With reference to an industry of your choice, identify a real-world example of firms formally or tacitly engaging in collusion, taking care to fully explain the nature of the collusive conduct. Using the economic theory presented in class, analyse the drivers of collusion in your chosen case. Also, critically evaluate the effects of an eradication of collusion – which would strengthen the competition between these industry rivals – on both the welfare of consumers and the financial performance of the firms themselves.
In 2002, according to publications by the Toy Industries of Europe (2003), the UK was the largest consumer of toys and games in the EU with a 24.2% share of the €12.7bn market. That equates to over €3bn spent on toys each year in the UK. However, despite these figures, the toy and gaming industry was facing difficulties in Western Europe with child population numbers on the decrease and the tendency for children to mature more quickly, meaning their propensity to use toys and games was diminishing at an earlier age (Keynote, 2002). These two factors combined to mean that the target market for toy and game makers was decreasing rapidly. However, as disposable income rose, so did the average spent on toys per child to a staggering €173 per year. The market for higher end children’s toys with increasing electronic complexities was dramatically on the rise, partially as a result of increasing incomes and also because of what Mintel (2003) describes as the “pester power factor” – children becoming better at persuading their parents to buy the things they want. This was coupled with a rise in demand for low-budget toys/collectables (e.g. tradable cards/stickers) from the ever-increasing market of children spending their own money – the “pocket money power factor”. These trends created a landscape in which firms would have to battle incredibly hard to continue making profits. The toy and games industry was split into three basic segments: manufacturers, retailers, and online distributors. These segments were all affected by the same market forces and, as such, had a high level of strategic interdependence. As a result, a combination of huge levels of industry turnover, decreasing market size, increasing consumer wealth and high levels of strategic interdependence between firms created a market that was ripe for collusion. Church & Ware (2000) define explicit collusion as when firms “mutually devise a common plan of action and exchange mutual assurances to follow that common course of action”. In 2003, Hasbro, Littlewoods and Argos were found guilty of doing this through price fixing in what Morgan (2010) describes as a ‘vertical cartel arrangement’ – where participants at different levels of the production/supply chain set up a collusive agreement. At the time, Hasbro was a leading global manufacturer of games such as Monopoly, Furby and Transformers with a UK turnover of £123.8 million in 2001. Catalogue retailers such as Argos and Index (owned by Littlewoods) made up roughly one quarter of the total distribution market, slightly behind Toy Specialists like Toys ‘R’ Us and General Merchandisers/Supermarkets. According to the official ruling of The Director General of Fair Trading “Hasbro, one of the largest toy and games suppliers in the UK, Argos and Littlewoods entered into price-fixing agreements that infringe section 2 of the Competition Act 1998”. The agreements took place between 1999 and September 2001 and consisted of two bilateral agreements set up by Hasbro with Littlewoods and Argos. Mulhearn et al. (2001) state that competition is important because “It underwrites the sovereignty of consumers and it is the process through which ‘good’ firms…drive out bad ones.” It is for this reason that The Competition Act 1998 had been brought in to crack down on collusion and anti-competitive behaviour.
The majority of the theories relevant to the subject of collusion and oligopolies revolve around...
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