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Collusion, concentration and profits

An empirical confrontation of an old story and a supergame implication

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Abstract

The paper confronts the hypothesis of a positive profitability concentration relationship (‘the old story’) with a robust prediction of supergame models (‘the new story’). In supergames the feasibility of collusion (and to some degree also actual profits) depends on relative profitability of defection versus that of collusion. The detrminants for this evaluation — the time discount proper, riskiness of markets, exit probability and lags — can be summarized as ‘relevant time discount’. Cross section empirical evidence (97 sectors, 886 firms) is more in line with the supergarme prediction. The evidence depends on the variables chosen to proxy the ‘relevant time discount’. Its value is limited as any evidence for game theoretical models supplied by cross section aggregate data. We followed Sutton (1991) to test robust predictions and Schmalensee (1989) to investigate the robustness of the results.

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Authors and Affiliations

  1. University of Linz and Austrian Institute of Economic Research, Vienna, Austria

    Karl Aiginger

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  1. Karl Aiginger
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I would like to thank Gerhard Clemenz, Sepp Falkinger, Paul A. Geroski, Georg Kirchsteiger, Dennis C. Mueller, Manfred Neumann, Robert Porter for helpful comments and suggestions. Part of the research was done during my sabbatical at M.I.T. Special thanks to Dagmar Guttmann and Traude Novak who gave assistance in providing the data and reading various drafts of the manuscript.

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Aiginger, K. Collusion, concentration and profits. Empirica 20, 159–173 (1993). https://doi.org/10.1007/BF01383979

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