The Economics of Tacit Collusion:Implications for Merger Control

• Published date: 01 April 2007
• Date: 01 April 2007
• DOI: https://doi.org/10.1016/S0573-8555(06)82008-0
• Pages: 217-239
• Author: Marc Ivaldi,Bruno Jullien,Patrick Rey,Paul Seabright,Jean Tirole

CHAPTER 8

The Economics of Tacit Collusion:

Implications for Merger Control1

Marc Ivaldi, Bruno Jullien, Patrick Rey, Paul Seabright and Jean Tirole

IDEI, Toulouse,France

8.1. Introduction

Tacit collusion refers to a group of oligopolists’ ability to coordinate, evenin the

absence of explicit agreement,2to raise price or more generally increase profit

at the detriment of consumers. It has been treated under the notion of collective

dominance in a number of important European Court decisions and under the

“coordinated effects” label in the US. The present chapter focuses on the eco-

nomic analysis of the impact of mergers on collusion and its consequences for

anti-trust policy.3

The legal treatment of collusion depends on the form it takes: explicit, tacit,

or any combination of the two. Explicit collusion or cartel agreements are usu-

ally banned under antitrust laws, such as Section 8.1 of the US Sherman Act

or Article 81 of the European Treaty. The treatment of tacit collusion has how-

ever been subject to more controversy than that of cartels, due the absence of a

formal agreement or explicit coordination.4For this reason the use of the con-

cept of tacit collusion has almost exclusively been used in merger control policy.

Moreover the European Commission has relied more heavily on it than the US

anti-trust authorities. This can be attributed mostly to the difference in the legal

procedures. While the Clayton Act prohibits a merger the effect of which “may

substantially lessen competition”, until recently, the European mergerregulation

allowed the Commission to declare incompatible with the EC treaties merg-

ers that “create or strengthen a dominant position as a result of which effective

1This chapter is based on a report on collective dominance for the European Commission (Ivaldi

et al., 2003). We thank Vivek Ghosal and John Martin for comments and references.

2“Tacit collusion” need not involveany “collusion” in the legal sense, and in particular need in-

volve no communication between the parties. A better term from a legal perspectivemight be “tacit

coordination”.

3See our report (Ivaldi et al., 2003) for a more complete analysis.

4See in particular the US Supreme Court opinion in Brooke Group, Ltd. v. Brown & Williamson

Tobacco Corp (1993) or the appeal decision in WilliamsonOil Co. v. Philip Morris USA (Eleventh

District, 2003). For the European Community, see the annulment by the Court of Justice of the

Commission Decision 85/202/EEC (the Woodpulp case).

CONTRIBUTIONS TO ECONOMIC ANALYSIS © 2007 ELSEVIER B.V.

VOLUME 282 ISSN: 0573-8555 ALL RIGHTS RESERVED

DOI: 10.1016/S0573-8555(06)82008-0

218 M. Ivaldi et al.

competition would be significantly impeded”, where dominance can be single

or collective. While the treatment of mergers in the US has mostly focused on

unilateral effects, with a minor role for coordinated effects, due to lack of clar-

ity in the interpretation of collective dominance, the European Commission has

in the past preferred to address issues of tacit collusion when dealing with col-

lective dominance with no structural links.5Only recently has the new Merger

regulation6of 2004 allowed the commission to address unilateral effects in a

more systematic way, by prohibiting a concentration which would “significantly

impede effective competition”.7

In this chapter, we review the main industry characteristics that affect collu-

sion. We then draw some implications for merger policy. Section 8.2 introduces

the concept of tacit collusion, while the factors that are relevant for collusion

are discussed in Section 8.3. Section 8.4 proposes a mathematical illustration.

Section 8.5 discusses non-price collusion. Finally Section 8.6 focuses on the

implications for the practice of merger control.

8.2. The economics of tacit collusion

Tacit collusion can arise when firms interact repeatedly. They may then be able

to maintain high prices through the threat that any deviation from the collusive

path would trigger some retaliation. To be sustainable, retaliation must be suf-

ficiently likely and costly to outweigh the short-term benefits from “cheating”

on the collusive path. These short-term benefits, as well as the magnitude and

likelihood of retaliation, depend in turn on the characteristics of the industry.

Retaliation refers to the firms’ reaction to a deviation from the collusive path.

A simple form of retaliation consists in the breakdown of collusion and the

restoration of “normal” competition and profits. Firms anticipate that if one at-

tempts to reap short-term profits, they will be no more collusion in the future.

Firms may then abide to the current collusive prices in order to keep the collu-

sion going, in which case collusion is self-sustaining. This form of collusion has

a simple interpretation: firms trust each other to maintain collusive prices; but

if one of them deviates, trust vanishes and all firms start acting in their short-

term interest. However, there may be more sophisticated forms of retaliation

that may inflict tougher punishments, thereby allowing sustaining higher collu-

sive prices. Another reason why returning forever to “normal competition” may

5Leading cases for EU are Gencor/Lonrho (M.619), Nestlé/Perrier (M.190) or Airtours/First

Choice (M.1524). In the US, the FTC has recently and unsuccessfully attempted to challenge a

merger on the ground of coordinated effects (FTC v.Arch Coal, 2004).

6Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations be-

tween undertakings (the EC Merger Regulation), Official Journal, L 24, 29.01.2004, pages 1–22.

7Another difference between the US and the EU concerns the proceedings: in the US a merger

can only be challenged before a court, whereas in the EU the procedure is internal to the European

Commission; the separation between investigation and decision is thus less clearin that case, despite

the scrutiny of the member States and the fact that the final decision is made by the Commissioners.