Many people imagine that businessmen could set in a room and come to a conspiracy decision to raise the prices up then increase their profits.
However, it’s really only an imagination.
It’s always not easy to form a cartel or collusive group in any business. There are some obstacles must be overcome with a critical tactic.
I wrote them down as following:
1. To form a cartel or a collusive group, the first problem the founder must face is that it’s hard to figure out who are all the possible competitors?
For example, if medical doctors successfully raise their treatment fee as high as they want, then people would turn to get medical advices from their druggists, god, or themselves.
This phenomenon did happen in Taiwan in 1950’s.
2.The second natural obstacle to form a collusive group is that each competitor has their own unique cost curve. And this fact will cause them has different motives to choose to get in or to get out the group.
This critical fact will still impact how successful a collusive group can be after its formation.
3.The third is the difference between the single-quality products and multiple-quality products.
There are only few products in the world can be classified as single-quality products, such as pure gold, silver, aluminum, or other chemical elements.
Even a diamond, usually has four major qualities to form a price. They are size, color, tarnish, and cutting. A consumer see only one price, however, it’s formed by the combination of four measured elements.
The more complexity of a product, the more rent value could be created by differentiating the product. That’s why most business always emphasize how different their products are from other competitors’. That’s also why we have so many brands. It is the most common phenomenon in the real world.
This would not only make people to apply unique way to maximize their interest, but also form different cost structures to every supplier.
That is one reason why we can find very few successful cartels in the real world.
4.Once a collusive group was formed, the member who has a highest marginal cost will has the strongest incentive to violate their agreement.
Because with fixed-price or fixed-quality rule, the biggest beneficiary would be the one who enjoys the lowest marginal and average cost. On the contrary, the one with higher marginal or average cost would eventually figure out that he can maximize his interest by breaching the rule.
5. How to enforce the agreement will be a huge challenge to the one who tries to maintain the collusive group.
There are two major costs to enforce an agreement successfully. One is to detect who violates the rule; and the other one is effective punishment.
OPEC, the most famous cartel in the world, is constantly unable to enforce their decisions completely for decades. (If they could, there will not be as much fluctuation in oil prices as observed.)
M&A might be an effective way to achieve this goal, however, it still cannot prevent the group from potential or new competitors which might be formed by the company seller or your employees. Even there are some contractual ways to deal with these problems, they don’t work as well as lawyers’ imagination.
According to commercial history, the most effective method is to introduce legal power or authorization to prevent possible breaches of members and new entrants, like a license system.
Conclusively, the fundamental problem of most collusive behaviors is not what a cartel intends to do, but the authorization makes them able to achieve their intentions.
Therefore, in the cases we read such as “FTC v. Indiana Federation of Dentists," Federal Trade Commission v. Superior Court Trial Lawyers Association," I think Sherman Act and judges both tried to find out the right answer in a wrong place.
On the other hand, there are some superficially collusive behaviors without legal power or authorization, mostly are caused by information cost of measurement or property maintenance cost, for example, “Broadcast Music, Inc. v. Columbia Broadcasting System, Inc." and “Fashion Originators’ Guild of America v. FTC case." The courts apparently had different degree of awareness of social cost in these two cases.
Somehow, in “Klor’s, Inc. v. Broadway-Hale Stores, Inc. (1959)," the Federal Supreme Court showed distinguished lack of cost concept. I will talk about it in the next article.