Terms of Strategy

Topics: Collusion, Pricing, Cartel Pages: 8 (2137 words) Published: April 1, 2013
1. Tacit Collusion
2. Explicit Collusion
3. Collusive Price Setting
4. Predatory Pricing
5. Mutual forbearance
6. Game Theory
7. Market Commonality
8. Antitrust Policy
9. Operational Synergy
10. Financial Synergy

Tacit Collusion:

“Circumstance where two companies agree upon a certain strategy without putting it in writing or spelling out the strategy explicitly”

Tacit Collusion is seemingly independent; Two firms agree to play a certain strategy without explicitly saying so. Oligopolists usually try not to engage in price cutting, excessive advertising or other forms of competition. Thus, there may be unwritten rules of collusive behaviour such as price leadership (tacit collusion). A price leader will then emerge and sets the general industry price, with other firms following suit. Also termed implicit collusion, the distinguishing feature of tacit collusion is the lack of any explicit agreement. Examples

* Market division and price-fixing among manufacturers of heavy electrical equipment in the 1960s, including General Electric. * An attempt by Major League Baseball owners to restrict players' salaries in the mid-1980s. * The sharing of potential contract terms by NBA free agents in an effort to help a targeted franchise circumvent the salary cap

Explicit Collusion:
 Also termed overt collusion, this occurs when two or more firms in the same industry formally agree to control the market. Examples:
* De Beers is the example of explicit collusion.

* The most recent example of a cartel was between Unilever and Procter & Gamble who were found guilty of price fixing washing powder in 8 European countries. The case that was conducted by the European Commission after a tip off from Germany Company, Henkel. The resulting penalty was a 315 million euros fine, split between Unilever (104m Euros) and Procter & Gamble (211m Euros

* Many trade organizations, especially in industries dominated by only a few major companies, have been accused of being fronts for cartels:

* An example of a new international cartel is the one created by the members of the Asian Racing Federation and documented in the Good Neighbour Policy signed on September 1, 200 -------------------------------------------------

Game Theory
A model of optimality taking into consideration not only benefits less costs, but also the interaction between participants. 

Game theory attempts to look at the relationships between participants in a particular model and predict their optimal decisions.

Five Pirates find 100 gold coins. They must decide how to distribute them.The Pirates have a strict order of seniority: Pirate A is senior to B, who is senior to C, who is senior to D, who is senior to E.

The Pirate world's rules of distribution are thus: the most senior pirate should propose a distribution of coins. The pirates, including the proposer, then vote on whether to accept this distribution. If the proposed distribution is approved by a majority or a tie vote, it happens. If not, the proposer is thrown overboard from the pirate ship and dies, and the next most senior pirate makes a new proposal to begin the system again.

Pirates base their decisions on three factors. Firstly, each pirate wants to survive. Secondly, each pirate wants to maximize the amount of gold coins he receives. Thirdly, each pirate prefer to throw another overboard, if doing so does not decrease his own gold coins.

Can Pirate A survive? If so, what distribution of coins should he propose? Pirate A needs to predict which distributions are acceptable to the other pirates. That, in turn, depends on which distributions the other pirates can expect if they throw Pirate A overboard. To predict those distributions, start from the end of the possible ends of the game and...
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