(Collusion) Industries A and B can be characterized by a series of parameters: n
ID: 1109624 • Letter: #
Question
(Collusion) Industries A and B can be characterized by a series of parameters: n, the number of firms, is 8 in both industries; r, the annual interest rate, is 10% in both industries; f, the frequency with which firms interact (number of times per year), is 1 in industry A and 12 in industry B; g, the industry growth rate, is 10% in industry A and 30% in industry B; finally, h, the likelihood that the industry will continue in existence into the next period, is 80% in industry A and 100% in industry B.
In which of the two industries do you think tacit collusion is more likely to take place? Briefly justify your answer.
Explanation / Answer
Tacit collusion occurs when firms don't want to engage in price war and accept the price of dominant firm in the industry for greater profit.
Tacit collusion happen when industry overall profit is greater than sum of individual profits.
factor on which tacit collusion depends:
1) Amount of incentive available to the firm or no of firm into the market. Here, we have same no. of competetors in both industry then it is not the likely factor which decide collusion.
2) Higher industry growth
3) Lower interest rate
4) Higher interaction between firms
5) likehood that the industry will continue in existence into the next period
likelihood of collusion determines by the effective discount factor:
a = (h (1 + g))/(1 + (r/f))
where, h is likehood that the industry will continue in existence into the next period
g is industry growth rate
r is rate of interest
f is interaction b/w firms
a is discounting factor
Higher the value of 'a' higher the chances of collusion
For industry A
a = (h (1 + g))/(1 + (r/f))
a= (.80(1+0.10))/(1 +( 0.1/1))
a = 0.8
for industry B
a = (1(1-0.30))/(1+(0.1/12))
a = 0.694
We can clearly elicit from above values of effective discounting factors of both industries that the tacit collustion in industry A is more likely to happen.
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