Wiki Space Paper: Collusion Charles T. Simpson Background:
The formation of this analysis and the purpose of my research into collusion within the marketplace was taken from the NASDAQ and Justice Department probe. The potential violation includes companies listed as major market makers in the NASDAQ stocks. The purpose and intent of market makers is to compete against each other thus establishing the quoting bid and ask prices used for particular stocks (Baye). The alleged violations state that companies, who served as market makers, had a common understanding in the manner in which bids and ask were displayed on the quoting convention. The problem, or violation at hand, indicates there alleged market makers were colluding with one another in an attempt to increase a wider inside spread. The collusion amongst the various companies would be proved by various occurrences that noticed the inactivity or complete absence of bids and ask price quotes once dealer spread rose to a pre-determined level. As result of the alleged collusion, quoting convention had the following effects (Baye):
- Price competition among the companies in question in the purchase and sale of NASDAQ securities might have been restrained
- Investors who have purchased or sold NASDAQ securities might have been deprived of the benefits of free and open competition in the purchase and sale of NASDAQ securities.
- Inside spread on the substantial number of NASDAQ stocks has possibly been wider than it would have been in a competitive market, resulting in higher transaction costs for buying and selling NASDAQ stocks.
Introduction:
Collusion is defined in many different contexts and forms. From Merriam Webster, the word collusion means a secret agreement or ‘cooperation’ especially for an illegal or deceitful purpose. Notice the words italicized in this definition. Throughout my experiences, not only in the realm of academia, but also professionally, the cognition of collusion was shadowed by negative light. My research in this Wiki Space proves that collusion—in the most simplicity form is highly overshadowed by a negative connotation and thus should be treated as an illegal form of cooperation. Throughout this analysis, I will use collusion in the context that is perceived to be negatively speaking. I will include a section that will serve as a means-to-end and provide some rationale as to how collusion can be constructed in a more encouraging light. My argument, formed by this analysis and from the foundation of my Wiki Space, is intended to further explore the realm of collusion and discuss topics related to the subject matter. I will use the Wiki Space discussion log and various scholarly articles in forming this analysis.
Collusion:
As evident in the NASDAQ case study, collusion can occur within the stock market to attempt to disrupt the market equilibrium between two or more entities. This non-competitive agreement can take the form in the stock market in a few different directions:
-Colluding traders to share private information to benefit from a possible takeover
-Allowing others to benefit from insider trading
-Price rigging, therefore inflating the price of assets to realize the higher profit
-Subcontracting arrangements that are often part of a big-rigging scheme.
As one may note in the above description, collusion can occur outside the stock market in various other industries. In the most simplistic form, collusion can take place whenever two or more entities combine to form a cooperative agreement and discourage or avert competition to take place. The Sherman Antitrust Act was a response from the United States to act upon and investigate causes of antitrust violations and limit cartels and monopolies (Department of Justice). The aim of the act is to protect the consumers by preventing arrangements or which tend to advance the overall cost of the consumer. Today the Act serves as the basis for many antitrust litigation by the government. A news report released by the National Post, noted the realization of collusion within the construction industry in Quebec. The head of Quebec’s anti-collusion squad, Jacques Duchesneau, appeared before a public administration committee to warn the officials that organized crime— collusion, was knocking on the door. Duchesneau, noted a tie existed between construction industries and the political parties. He was quoted in saying, “for a lot of people, colluding, defrauding the government, increasing prices and shoving aside the competition, that’s just the way business is done Graeme” (Hamilton).
Cases of Collusion:
The focal point of this project, which is on Baye’s NASDAQ case. However, I quickly learned through reading various articles and cases, that collusion is not mutually exclusive just to the stock market. Many industries face the notion of collusion as it relates to an anti-competitive landscape. As I researched through this theory of collusion outside of the stock market, a heavy focus of information was placed on the Department of Justice. An article from DOJ, noted this observation on collusion: “while collusion can occur in almost any industry, it is more likely to occur in some industries than in other. An indicator of collusion may be more meaningful when industry conditions are already favorable to collusion” (Department of Justice). Multiple facts and trends have emerged to indicate the probability or relationship amongst industries and collusion. The Department of Justice released an article that noted the conditions that are favorable to collusion:
- Collusion is more likely to occur in a market with few sellers because the fewer the sellers, the easiest for them to cooperative and agree on prices, bids, customers or regions
- The probability of collusion increases if other products cannot be substituted easily or if restrictive specifications exist for the product being acquired
- Typically the more standardized a product is, the easier it is for competing firms to reach agreements on common pricing strategies
- Collusion is more likely to occur if the competitors are familiar with each other and are also connect through social avenues
After reading this and several other articles from the Department of Justice, I wanted to define the market that collusion could take the form. In an oligopoly, the market structure is made up by a small number of (large) firms. In this market, the barriers to enter are significantly high thus preventing new competition into the market. These firms that already exist historically dominate the market by selling very closely related to identical differentiated products (Oligopoly). The characteristics within an oligopoly marketplace can induce the conditions that collusion can potentially take shape. Connecting this article with the article from the Department of Justice, I find immense correlation between the two. In fact, the oligopoly article points that besides the behavioral tendencies of collusion exist other predispositions of oligopoly that include: non-price competition, rigid prices, and interdependence. I will discuss later in this analysis on the relationship between tacit collusion and interdependence of firms.
Reading the stories of collusion and antitrust suites is not an uncommon practice, especially with the media outlet power of today. The multiple stories I read for anti-competition were endless and very costly for the companies (people) involved. One case in particular, found a pipe and steel company guilty of antitrust laws against the United States. In the case of Addyston Pipe and Steel Co v. United States, the opinion of the court ruled that the defendants operated in an agreement so when municipalities offered projects available to the lowest bidders, the companies involved would overbid to allow the "designated company" at the time, to win the low bid. This colluding activity ultimately guaranteed success for all companies involved to win as the low bidder (FindLaw: Cases and Codes).
Legality of Collusion:
Throughout this analysis, the common theme from a legality sense is 'unlawful acts' that interferes with competition. Through the use of price fixing or rigging, to the release of secrete agreements, collusion is represented by illegal acts. One of the topics I wanted to investigate further is the connection with cartels and this buzz word, collusion. Two articles entitled, If OPEC is a Cartel, Why Isn’t It Illegal and A legal case against the OPEC cartel, served as my premise for discussion on cartels. The organization was formed in 1960 as a means to give producers more control over petroleum prices and production. In the 1990s, when oil prices tumbled, the organization took a huge blow. Any antitrust legislation against OPEC makes critics a bit nervous, as it did in 2007 when Allan Hubbard, director of President Bush’s National Economic Council quoted in a letter to Pelosi; (a law) would “encourage retaliation against American businesses abroad, discourage job-creating investment in the U.S. economy and injure U.S. relations with other countries” (Weil). The United States House of Representatives tried to take action in 2008, passing the Gas Price Relief for Consumers Act of 2008, however the bill was killed later the same year. What exactly is OPEC if the terminology doesn’t allow for antitrust legislation? Some authors indicate that, “OPEC may call itself an organization, but it is, pure and simple, a cartel that manipulates markets, restricts output, and fixes prices” (Bush, First and Flynn). The argument of OPEC as a legal cartel or simply a giant gas guzzling bully is not the premise of this analysis, but it does segway into another interesting topic that I wanted to focus on and that is tacit collusion.
I took a heavy interest in managerial strategy, more precisely now to align oneself within the market. I have read numerous articles from Porter and Hayes as it relates to competitive advantage and competitive sustainability. So, I wanted to combine that theory with tacit collusion to identify if this type of collusion could create a sustainable competitive advantage. Tacit collusion occurs when two or more entities agree upon a strategy without explicitly saying so or writing so. The classic example is when a firm sets as a price leader and watches as others follow suit. The reaction upon all firms within that industry will dictate the price leader. Once a firm understands how firms will adjust prices or other strategies, they can better adjust their own strategy. However, the notion that firms are using tacit collusion or are just simply reacting to market adjustments is questionable and the burden of proof is difficult. My question is this; if firms can sustain an advantage by tacit knowledge—knowledge learned from experience and past doings, then can tacit collusion amongst firms sustain the same way? My initial thought was yes, but only for a sustained amount of time. I don’t believe this strategy is as strong suited as the strategy of tacit knowledge, because prices are much more visible and transparent then a general in-house strategy. The strategy of observing firm’s pricing strategies and explicitly colluding, can only sustain for a short amount of time before the market equilibrium balances out.
Questions: In what form can collusion take form?
-Colluding traders to share private information to benefit from a possible takeover -Allowing others to benefit from insider trading -Price rigging, therefore inflating the price of assets to realize the higher profit -All the above
What are the conditions that are favorable to for collusion?
- Collusion is more likely to occur in a market with few sellers because the fewer the sellers, the easiest for them to cooperative and agree on prices, bids, customers or regions - The probability of collusion increases if other products cannot be substituted easily or if restrictive specifications exist for the product being acquired - Typically the more standardized a product is, the easier it is for competing firms to reach agreements on common pricing strategies - All the above
What are the characteristic(s) of an oligopoly: - A small number of firms - High barriers to entry - Closely related to identical differentiated products - All the above
Charles T. Simpson
Background:
The formation of this analysis and the purpose of my research into collusion within the marketplace was taken from the NASDAQ and Justice Department probe. The potential violation includes companies listed as major market makers in the NASDAQ stocks. The purpose and intent of market makers is to compete against each other thus establishing the quoting bid and ask prices used for particular stocks (Baye). The alleged violations state that companies, who served as market makers, had a common understanding in the manner in which bids and ask were displayed on the quoting convention. The problem, or violation at hand, indicates there alleged market makers were colluding with one another in an attempt to increase a wider inside spread. The collusion amongst the various companies would be proved by various occurrences that noticed the inactivity or complete absence of bids and ask price quotes once dealer spread rose to a pre-determined level. As result of the alleged collusion, quoting convention had the following effects (Baye):
- Price competition among the companies in question in the purchase and sale of NASDAQ securities might have been restrained
- Investors who have purchased or sold NASDAQ securities might have been deprived of the benefits of free and open competition in the purchase and sale of NASDAQ securities.
- Inside spread on the substantial number of NASDAQ stocks has possibly been wider than it would have been in a competitive market, resulting in higher transaction costs for buying and selling NASDAQ stocks.
Introduction:
Collusion is defined in many different contexts and forms. From Merriam Webster, the word collusion means a secret agreement or ‘cooperation’ especially for an illegal or deceitful purpose. Notice the words italicized in this definition. Throughout my experiences, not only in the realm of academia, but also professionally, the cognition of collusion was shadowed by negative light. My research in this Wiki Space proves that collusion—in the most simplicity form is highly overshadowed by a negative connotation and thus should be treated as an illegal form of cooperation. Throughout this analysis, I will use collusion in the context that is perceived to be negatively speaking. I will include a section that will serve as a means-to-end and provide some rationale as to how collusion can be constructed in a more encouraging light. My argument, formed by this analysis and from the foundation of my Wiki Space, is intended to further explore the realm of collusion and discuss topics related to the subject matter. I will use the Wiki Space discussion log and various scholarly articles in forming this analysis.
Collusion:
As evident in the NASDAQ case study, collusion can occur within the stock market to attempt to disrupt the market equilibrium between two or more entities. This non-competitive agreement can take the form in the stock market in a few different directions:
-Colluding traders to share private information to benefit from a possible takeover
-Allowing others to benefit from insider trading
-Price rigging, therefore inflating the price of assets to realize the higher profit
-Subcontracting arrangements that are often part of a big-rigging scheme.
As one may note in the above description, collusion can occur outside the stock market in various other industries. In the most simplistic form, collusion can take place whenever two or more entities combine to form a cooperative agreement and discourage or avert competition to take place. The Sherman Antitrust Act was a response from the United States to act upon and investigate causes of antitrust violations and limit cartels and monopolies (Department of Justice). The aim of the act is to protect the consumers by preventing arrangements or which tend to advance the overall cost of the consumer. Today the Act serves as the basis for many antitrust litigation by the government. A news report released by the National Post, noted the realization of collusion within the construction industry in Quebec. The head of Quebec’s anti-collusion squad, Jacques Duchesneau, appeared before a public administration committee to warn the officials that organized crime— collusion, was knocking on the door. Duchesneau, noted a tie existed between construction industries and the political parties. He was quoted in saying, “for a lot of people, colluding, defrauding the government, increasing prices and shoving aside the competition, that’s just the way business is done Graeme” (Hamilton).
Cases of Collusion:
The focal point of this project, which is on Baye’s NASDAQ case. However, I quickly learned through reading various articles and cases, that collusion is not mutually exclusive just to the stock market. Many industries face the notion of collusion as it relates to an anti-competitive landscape. As I researched through this theory of collusion outside of the stock market, a heavy focus of information was placed on the Department of Justice. An article from DOJ, noted this observation on collusion: “while collusion can occur in almost any industry, it is more likely to occur in some industries than in other. An indicator of collusion may be more meaningful when industry conditions are already favorable to collusion” (Department of Justice). Multiple facts and trends have emerged to indicate the probability or relationship amongst industries and collusion. The Department of Justice released an article that noted the conditions that are favorable to collusion:
- Collusion is more likely to occur in a market with few sellers because the fewer the sellers, the easiest for them to cooperative and agree on prices, bids, customers or regions
- The probability of collusion increases if other products cannot be substituted easily or if restrictive specifications exist for the product being acquired
- Typically the more standardized a product is, the easier it is for competing firms to reach agreements on common pricing strategies
- Collusion is more likely to occur if the competitors are familiar with each other and are also connect through social avenues
After reading this and several other articles from the Department of Justice, I wanted to define the market that collusion could take the form. In an oligopoly, the market structure is made up by a small number of (large) firms. In this market, the barriers to enter are significantly high thus preventing new competition into the market. These firms that already exist historically dominate the market by selling very closely related to identical differentiated products (Oligopoly). The characteristics within an oligopoly marketplace can induce the conditions that collusion can potentially take shape. Connecting this article with the article from the Department of Justice, I find immense correlation between the two. In fact, the oligopoly article points that besides the behavioral tendencies of collusion exist other predispositions of oligopoly that include: non-price competition, rigid prices, and interdependence. I will discuss later in this analysis on the relationship between tacit collusion and interdependence of firms.
Reading the stories of collusion and antitrust suites is not an uncommon practice, especially with the media outlet power of today. The multiple stories I read for anti-competition were endless and very costly for the companies (people) involved. One case in particular, found a pipe and steel company guilty of antitrust laws against the United States. In the case of Addyston Pipe and Steel Co v. United States, the opinion of the court ruled that the defendants operated in an agreement so when municipalities offered projects available to the lowest bidders, the companies involved would overbid to allow the "designated company" at the time, to win the low bid. This colluding activity ultimately guaranteed success for all companies involved to win as the low bidder (FindLaw: Cases and Codes).
Legality of Collusion:
Throughout this analysis, the common theme from a legality sense is 'unlawful acts' that interferes with competition. Through the use of price fixing or rigging, to the release of secrete agreements, collusion is represented by illegal acts. One of the topics I wanted to investigate further is the connection with cartels and this buzz word, collusion. Two articles entitled, If OPEC is a Cartel, Why Isn’t It Illegal and A legal case against the OPEC cartel, served as my premise for discussion on cartels. The organization was formed in 1960 as a means to give producers more control over petroleum prices and production. In the 1990s, when oil prices tumbled, the organization took a huge blow. Any antitrust legislation against OPEC makes critics a bit nervous, as it did in 2007 when Allan Hubbard, director of President Bush’s National Economic Council quoted in a letter to Pelosi; (a law) would “encourage retaliation against American businesses abroad, discourage job-creating investment in the U.S. economy and injure U.S. relations with other countries” (Weil). The United States House of Representatives tried to take action in 2008, passing the Gas Price Relief for Consumers Act of 2008, however the bill was killed later the same year. What exactly is OPEC if the terminology doesn’t allow for antitrust legislation? Some authors indicate that, “OPEC may call itself an organization, but it is, pure and simple, a cartel that manipulates markets, restricts output, and fixes prices” (Bush, First and Flynn). The argument of OPEC as a legal cartel or simply a giant gas guzzling bully is not the premise of this analysis, but it does segway into another interesting topic that I wanted to focus on and that is tacit collusion.
I took a heavy interest in managerial strategy, more precisely now to align oneself within the market. I have read numerous articles from Porter and Hayes as it relates to competitive advantage and competitive sustainability. So, I wanted to combine that theory with tacit collusion to identify if this type of collusion could create a sustainable competitive advantage. Tacit collusion occurs when two or more entities agree upon a strategy without explicitly saying so or writing so. The classic example is when a firm sets as a price leader and watches as others follow suit. The reaction upon all firms within that industry will dictate the price leader. Once a firm understands how firms will adjust prices or other strategies, they can better adjust their own strategy. However, the notion that firms are using tacit collusion or are just simply reacting to market adjustments is questionable and the burden of proof is difficult. My question is this; if firms can sustain an advantage by tacit knowledge—knowledge learned from experience and past doings, then can tacit collusion amongst firms sustain the same way? My initial thought was yes, but only for a sustained amount of time. I don’t believe this strategy is as strong suited as the strategy of tacit knowledge, because prices are much more visible and transparent then a general in-house strategy. The strategy of observing firm’s pricing strategies and explicitly colluding, can only sustain for a short amount of time before the market equilibrium balances out.
Questions:
In what form can collusion take form?
-Colluding traders to share private information to benefit from a possible takeover
-Allowing others to benefit from insider trading
-Price rigging, therefore inflating the price of assets to realize the higher profit
-All the above
What are the conditions that are favorable to for collusion?
- Collusion is more likely to occur in a market with few sellers because the fewer the sellers, the easiest for them to cooperative and agree on prices, bids, customers or regions
- The probability of collusion increases if other products cannot be substituted easily or if restrictive specifications exist for the product being acquired
- Typically the more standardized a product is, the easier it is for competing firms to reach agreements on common pricing strategies
- All the above
What are the characteristic(s) of an oligopoly:
- A small number of firms
- High barriers to entry
- Closely related to identical differentiated products
- All the above
Works Cited:
"ADDYSTON PIPE & STEEL CO. v. U. S., 175 U.S. 211 (1899) ." FindLaw: Cases and Codes. N.p., 2011. Web. 2 Dec 2011. <http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=us&vol=175&invol=211>
Baye, Michael. Managerial Economics and Business Strategy. 7. New York: McGraw-Hill Irwin, 1994.
Bush, Darren, Harry First, and John Flynn. "A legal case against the OPEC cartel." Christian Science Monitor. (2008): n. page. Web. 5 Dec. 2011. <http://www.csmonitor.com/Commentary/Opinion/2008/0623/p09s02-coop.html>.
Hamilton, Graeme. "Quebec anti-collusion head calls for construction industry inquiry." National Post [MONTREAL] 27 Sept 2011, n. pag. Web. 2 Dec. 2011. <http://news.nationalpost.com/2011/09/27/quebec-anti-collusion-head-calls-for- construction-industry-inquiry/>.
OLIGOPOLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2011. [Accessed: December 1, 2011].
"PRICE FIXING, BID RIGGING, AND MARKET ALLOCATION SCHEMES:." Department of Justice. N.p., n.d. Web. 3 Nov 2011. <http://www.justice.gov/atr/public/guidelines/211578.
Weil, Dan. "("FindLaw: Cases and Codes")." News Max. (2007): n. page. Web. 4 Dec. 2011. <http://www.newsmax.com/Newsfront/opec-cartel-illegal/2009/12/12/id/341497>.