The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
The Forum - On Line Opinion's article discussion area



Syndicate
RSS/XML


RSS 2.0

Main Articles General

Sign In      Register

The Forum > Article Comments > Tricky Dicky, the Colluder-in-Chief > Comments

Tricky Dicky, the Colluder-in-Chief : Comments

By Jonathan J. Ariel, published 12/10/2007

From an economic perspective, just what did Visy and Amcor do that was so horrid? The games oligopolies play ...

  1. Pages:
  2. Page 1
  3. All
Very interesting to me as a lay person in this kind of game-theory analysis. I wonder why Barons bother to collude in a manner that qualifies as cheating. A comfy oligopoly can exist without any collusion. No need for any nods and winks. Just a comfy high level of profit for all, without any aggressive attempts to pinch market share. The only restraint against this situation would be a new competitor saying "whow there are easy profits in that game, I want to play". The magnitude of start-up costs would be an important variable in the continuing comfort of such an oligopoly. I think of the pharmaceutical and financial services industries as nice examples.
I don't think for a moment that there could be any collusion between JetStar and Virgin Blue and they have managed to set price levels where both can operate comfortably. So comfy I suppose that a new airline is attracted to the market. Would it have been collusion if Qantas had announced publically that it was going to aggressively defend say 70% of the market? Cut into that percentage brother and we are likely to have a price war that will shred everyones profits? Why do the Barons need to cheat is my question?
Posted by Fencepost, Sunday, 14 October 2007 7:01:33 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
Hi Fencepost,

To answer your question, lets look at another industry - aviation.

In the situation where two firms dominate the market, called a Duopoly, profits and prices are maximised when collusion takes place and the two firms operate as though they were one monopolist.

A key issue is the relative market shares of the two firms.

Say for instance Qantas (QF) and United Airlines (UA) respectively have 78 percent and 15 percent of the Sydney-Los Angeles aviation market, with Air New Zealand, Air Canada, Air Tahiti and China Eastern combined carrying the remaining 7 percent of passengers.

Given the stranglehold that QF and UA have on that sector, any new small operator will fight for a share of the 7 percent and not the 93 percent of QF and UA. By stranglehold, I mean that with full planes, both QF and UA would not gain a thing by lowering their prices. In fact they would only lose revenues.

QF and UAs prices from Sydney to LA for say November is available on the following link (copy, cut and paste the link in full).

http://res.zuji.com/aircairline.ctl?promo_page=Y&self_trav=1&pax_cnt=1&chld_pax_cnt=0&module=calendar&show_express_page=1&dep_arp_cd(1)=SYD&arr_arp_cd(1)=LAX&dep_arp_cd(2)=LAX&arr_arp_cd(2)=SYD&trip_option=roundtrp&cls_svc=YR&adult_pax_cnt=1&cache_Service=ZUJIAU&cache_dep_arp_cd=SYD&cache_arr_arp_cd=LAX&cache_dep_month=Nov&cache_ret_month=Nov&cache_pref_aln=all&SEQ=119236145291260710152007&LANG=EN&Service=ZUJIAU&SID=T0072000070344031114100614415437172451&last_pgd_page=

The terms of the ticket, aircraft type and travel rules are very, very similar if not identical for QF and UA.

On this site you can see flights in November from Syd-Lax on a variety of airlines with prices starting at $1,213 on Air Tahiti. What is mesmerising is that both QFs and UAs cheapest seats are $1,549. This raises two questions? Are they operating as a monopoly? And are they sharing the market according to some arrangement?

Interesting that the carriers offer other identical fares at $1,649 and at 1,732 fares. Again identical! Truly amazing!

As they fly full, clearly if either airline lowered his prices then the other would retaliate and both airlines would see profits nosedive.

Of course the big two keep an eye on the competition, but it seems that any leakage of passengers to small carriers like Air Tahiti (even with their $1,213 fares) is so small, it can be ignored.
Posted by Jonathan J. Ariel, Sunday, 14 October 2007 10:10:23 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
Thanks for that detailed exposition of the cross Pacific air trade Jonathon, very interesting.
But doesn't that support my point. The big boys don't need to cheat so long as they can maintain a very comfy duopoly?
They would be absolutely stupid to have any conversations whatsoever about their pricing that could open them to charges of collusion - merely watching and copying the other fellow's price structure would be enough. So why cheat?

Fencepost.
Posted by Fencepost, Monday, 15 October 2007 3:57:21 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
Hi again

You asked why do firms cheat on an agreement.

A cartel works by offering an identical product for sale at a uniform price.

But agreeing to a common price for the cartel is not always easy. It is easier if there are few or no differences between the firms both in terms of their products and their production costs. Firms will find it harder to agree on a common price if the differences in their products are substantial, for example in terms of quality.

Also, if firms operate at different levels of cost, then they will have different prices at which they maximize profits, making it harder to agree on the common price.

Another reason may be specific to one player. For example, one firm may want to grow market share irrespective of growing profits and will therefore cheat.

Please see the attached link for an elaboration on implicit or tacit collusion.

http://en.wikipedia.org/wiki/Tacit_collusion

But sometimes an explicit agreement is sought by the payers. See the link below on Cartels

http://en.wikipedia.org/wiki/Cartel
Posted by Jonathan J. Ariel, Monday, 15 October 2007 7:05:46 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
  1. Pages:
  2. Page 1
  3. All

About Us :: Search :: Discuss :: Feedback :: Legals :: Privacy