Fighting Hard Core Cartels

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This research project has as its objective to more fully understand when cartels form, how cartels price, and, ultimately, how to deter and detect cartels. Its defining perspective is to take into account a key goal of any illegal cartel: to raise prices but not suspicions: a cartel wants to avoid the appearance that there is a cartel. The PI will develop a new dynamic model of cartel pricing which encompasses strategic behavior to avoid detection. This produces a rich description of cartel pricing for both the transitional phase -- as firms move from competing to colluding -- and the stationary phase. Collusive markers are developed with respect to such measures as the price variance, the relationship between price and observed cost shocks -- especially along the transition path -- and, by endogenizing cartel meetings, the frequency and periodicity of price changes. The PI plans to use this model to develop a "test bed" for evaluating statistical tests to distinguish collusive pricing patterns from competition.A second part of the project focuses on leniency programs. These are used in the U.S. and the E.U. to encourage individual cartel members to cooperate with government investigations of cartel practices. The PI will develop a model of a population of industries and use that model to describe which industries form successful cartels. This model will be the basis for an empirical investigation of the U.S. leniency program. The PI will also use the model to evaluate possible changes to the current US and European programs.This research will help to build a foundation for better antitrust policy towards price-fixing cartels.