1Overview: Collusion and Competition in Oligopolistic Markets• General Electric vs. Westinghouse– The competitive situation in 1963– Strategy consultant: recommendation– What GE did– Westinghouse consultant: recommendation– What Westinghouse did– Consent decree• CartelsThe Turbine Generator Business• The product?• The players?• The purchasing process?• History of competition & pricing2Industry Attractiveness3Consultant’s Recommendations•••••••4GE Response: New Price Policy•••••GE Response: Continued••••5Why a Price Book?• Facilitation of pricing for complex array of related products• Steel and basing point pricing• Airline attempts6Westinghouse Response••••Consent Decree••••7A New Era for Anti-Trust“The prototype price-fixing deal calls for competitors to gather in a smoke-filled room. But last week the Justice Department chalked up its first significant victory against a pricing arrangement so indirect that the supposed conspirators never even met.”-- Business Week, December 19768Cartels• What is a cartel? • What’s conducive to cartel formation?– Homogeneous products. Why?• Cartels often arise after “destructive competition.”– Inelastic demand– High entry barriers– No Legal Impediments.• International businessExamples of Cartels• Oil (OPEC)• Uranium • Diamonds (DeBeers)• Government Supported Cartels9Understanding CartelsPinpoint the essentials:• Agreement - How, where, etc.?• Monitoring - How is it done?• Enforcement - What is the threat to cheaters?OPEC: Basic Analysis•Agreement?– Open meetings among members– Production quotas set• Monitoring?– OPEC monitors imports/exports, prices• Enforcement – Threat to cheaters? Saudis will flood market.• Ongoing Issues– External (non OPEC suppliers)– Internal - Domestic financing of OPEC members10What are the Most Visible Cartels in the United States?Hints:• Exempt from Antitrust• There is a section of (almost) every daily newspaper devoted to them•••11Take Away Points• Successful Collusion requires three elements: Agreement, Monitoring, Enforcement.• Again: credibility, commitment, and the ability to understand your opponent are key aspects of strategic interaction.• "Price protection/Most favored nation" clauses may actually limit
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