Essays on collusion: Dynamic models for dynamic markets

The first chapter of the dissertation, Examining Models of Collusion: the Market for Lysine, uses a recent case of collusion to assess the explanatory power of alternative theoretical models of collusion. Confessions of price-fixing by participating firms and data availability make the lysine market an ideal vehicle for this purpose. A market demand equation is estimated and detailed cost data for a major firm obtained to calculate the markup over marginal costs of that firm. This markup is then compared to the markup predicted by several classes of collusion models. It is concluded that static and repeated games models provide incomplete guidance for firm behaviour. This point is highlighted by the dramatic role played by entry in the lysine market.;This point is taken up in the second chapter, A Model of Collusion Timing. Here, a model of collusion is developed that affords a substantial role to entry. Heterogeneous firms make decisions about entry, exit, collusion, and investment within an evolving environment. The model is strongly motivated by the experience in the lysine market. It is calibrated using the demand estimates and cost information obtained for that market, and the collusive agreement adopted is based on the simple rule of thumb that operated. It is found that an entrant will wait until it has built up a market share comparable with its competitors before agreeing to collude. Further, allowing for collusive possibilities tends to generate a less concentrated industry with reduced consumer welfare. The model could provide insights into any market with the possibility of entry and collusion, and some uncertainty about the characteristics of potential entrants.;Chapter 3, Collusion with a Competitive Fringe: An Application to Vitamin C, probes the issue of cartel behaviour in the presence of a competitive fringe. Motivation is provided by events in the market for vitamin C, in which competition from a group of fringe firms forced the eventual dissolution of a major cartel. The model of Chapter 2 is tailored to incorporate fringe competition. Vitamin C demand estimates and cost information are used to parameterise the model. Results of the model are intimately linked to the dynamic nature of the model: a cartel is found to persist only while fringe competitors remain small; fringe competitors tend to invest heavily while a cartel is operating; entry deterrence is mitigated if cartel members are able to maintain the cartel following entry; and firms of an intermediate size are the most likely to accommodate entry.