Cartels are usually formed between a limited number of players which have a dominant market position in an oligopolistic market structure. Very little or no product differentiation as well as good communication and co-ordination possibilities due to few players in the bearing industry lead to perfect conditions to collude in a cartel. Firms mentioned in our case deliver to the market highly technologically advanced products, which make the entrance for new companies even harder. This resulted in a cartel to ensure stability in the demand and costs as well as predictability of profits. These companies agreed on fixed prices, fixed output and coordinated market action in order to maximize profits. The members of the cartel jointly acted like
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But if every cartel meber decides to cheat, more goods are available at lower prices. Hence the industry will become more saturated which will lead to a price fall towards the equilibrium price in a competitive market. This is depicted in graph 2 by the difference between P4 and P3. In consequence the market “moves toward the competitive equilibrium”. (Bade, R., & Parkin, M., 2009)
To better explain the consequences of different price strategies of each player in a cartel we refer to the prisoner’s dilemma as described in the game theory.
For the purpose of explanation we chose an example with fictive prices and profits in which NFC cheats by lowering its prices.
If we assume that every company makes in a cartel equal profits and NFC sets lower prices than the other bearings manufacturers then NFC would maximize its profits to 150 bn € and lower therefore the profits of other participants to 450 bn €. This would mean that each of the members who went for the high price strategy would make an average profit of only 90 bn …show more content…
Cartels are very difficult to root without the help of insiders. Authorities have developed a leniency program that could aid the detection. It provides incentives for companies to confess and snitch on rivals. This has become so successful that around fifty countries in the world have followed the same path. Most of the big cartel cases unfolded from these confessions. Leniency schemes are designed to be “trees that grow more and more branches as edgy companies, fearful that rivals will squeal first, revel hidden sins. By rewarding the first customer with amnesty, the amnesty programs reduce the wisdom of the wait and see strategy for cartel members. (Allain,
But if every cartel meber decides to cheat, more goods are available at lower prices. Hence the industry will become more saturated which will lead to a price fall towards the equilibrium price in a competitive market. This is depicted in graph 2 by the difference between P4 and P3. In consequence the market “moves toward the competitive equilibrium”. (Bade, R., & Parkin, M., 2009)
To better explain the consequences of different price strategies of each player in a cartel we refer to the prisoner’s dilemma as described in the game theory.
For the purpose of explanation we chose an example with fictive prices and profits in which NFC cheats by lowering its prices.
If we assume that every company makes in a cartel equal profits and NFC sets lower prices than the other bearings manufacturers then NFC would maximize its profits to 150 bn € and lower therefore the profits of other participants to 450 bn €. This would mean that each of the members who went for the high price strategy would make an average profit of only 90 bn …show more content…
Cartels are very difficult to root without the help of insiders. Authorities have developed a leniency program that could aid the detection. It provides incentives for companies to confess and snitch on rivals. This has become so successful that around fifty countries in the world have followed the same path. Most of the big cartel cases unfolded from these confessions. Leniency schemes are designed to be “trees that grow more and more branches as edgy companies, fearful that rivals will squeal first, revel hidden sins. By rewarding the first customer with amnesty, the amnesty programs reduce the wisdom of the wait and see strategy for cartel members. (Allain,