Silviase/jgov_v1.4_full_ann huggingface dataset:
Suppose for instance that, in the example above, one seller knows that demand for pears has decreased, so that he thinks the optimal price is now lower, say 1.8$. Absent communication with the other vendor, our seller faces a problem: if he reduces the price to 1.8$, as new market conditions suggest, collusion might break. Indeed, the rival vendor might have a different perception of market demand, and/or misinterpret the new low price as a “deviation”, and start a price war as a punishment. However, if he sticks instead to the usual price of 2$, he will make lower profits, because demand is lower.

Explicit collusion avoids this problem: our vendor could simply tell his rival that he thinks it would be better to decrease the price, and communication will allow them to decide on a new price that suits them both, without risking any price war or a lengthy adjustment period.

Market allocation (or market-sharing) schemes - according to which a firm sells in a certain region (or serves customers of a certain type), whereas the rivals sell in other regions (or serve customers of a different type) - whether achieved by explicit collusion or historical accidents, have the advantage of allowing for prices to adjust to new demand or cost conditions without triggering possible price wars. A market allocation scheme avoids the possibility that, if a shock reduces production costs or market demand, a price reduction might trigger a price war. As long as each firm does not serve segments of demand (explicitly or tacitly) allocated to rivals, prices can change without the collusive outcome being disrupted. This probably explains why such collusive schemes are often used. $ ^{7} $

I shall come back to the issues of communication and coordination among firms, and on why competition policy should focus on explicit collusive practices (that is, when some communication and coordination exists) in Section 3. Before doing that, however, I would like to conclude this part on the economics of collusion by briefly discussing the practices which facilitate collusion.

### 2.3 Factors that facilitate collusion

The analysis of collusion in modern industrial economics is based on the so-called incentive constraint for collusion: each firm compares the immediate gain it makes from a deviation with the profit it gives up in the future, when rivals react. Only if the former is lower than the latter will the firm choose the collusive strategy. In general, collusion is more likely to arise the lower the profit that a firm would obtain from deviating, the lower the expected profits it would make once the punishment starts, the more weight firms attach to the future (i.e., when the “loss from deviation” occurs).

A large part of the literature on collusion studies the factors which foster collusive outcomes, by relying on the framework just delineated (that is, the condition that says that a firm is better off colluding than deviating): if a given factor relaxes the incentive constraints of the firms, then it facilitates collusion;
if it makes it more binding, it hinders it; if the effect is ambiguous, then the factor does not have a clear impact on collusion.

The study of facilitating factors is important for two reasons. First, it allows to identify the practices that facilitate collusion so that anti-trust authorities can intervene so as to eliminate them whenever possible. Second, in merger analysis, it allows to evaluate whether a particular industry is prone to a collusive outcome or no, and therefore it gives indications as to whether a given merger should be prohibited or not. For the purpose of this paper, however, since we are interested on how to act against cartels, we can restrict attention only to those facilitating factors that can be controlled by the firms themselves, and we do not need to dwell upon structural facilitating factors that are exogenous to the firms, and which therefore are less relevant for detection and deterrence of cartels. $ ^{8} $

In what follows, I first (in Section 2.3.1) emphasise the role played by agreements to exchange information about past and current individual data; such agreements allow firms to improve observability of prices and quantities, and therefore to enforce collusion. Next (in Section 2.3.2) I discuss the role of communication among firms, stressing as announcements on future actions helps firms to coordinate on a particular collusive outcome. Finally, I will make some brief considerations on pricing clauses that may also facilitate collusion.

#### 2.3.1 Observability of firms' actions

Detection of deviations is a crucial ingredient for collusion, and Stigler (1964) argued that collusive agreements would break down because of secret price cuts. In fact, Green and Porter (1984) show that if actual prices (or price discounts) are not observable, collusion would be more difficult to sustain, but it could still arise at equilibrium. Their important contribution can be summarised in the following way. Imagine an industry where sellers cannot observe the prices charged by rivals and where market demand levels are also unobservable. Then, a seller would not know if a lower than expected number of customers served is due to a negative shock in demand or to a price cut by a rival which has stolen some (or all) of his business. Green and Porter show that if the discount factor is high enough, there exists a set of collusive strategies that represent an equilibrium. The strategies are such that each firm sets a collusive price (which might be the price that maximises joint profits) as long as every firm faces a high level of demand. When a firm faces a low (or zero) demand, then the punishment is triggered and each firm sets the one shot equilibrium price for a finite number of periods. After this finite punishment phase, all firms revert to the collusive price.

Therefore, the model implies that collusion can be sustained at equilibrium, but unlike the standard model with perfect observability, collusive prices and profits will never be observed forever, even if no firm deviates. Indeed, the punishment is triggered whenever a low level of demand is observed, and will
last for a certain number of periods, after which firms revert to the collusive prices. $ ^{9} $ The model has therefore an important implication. The observation of some periods with low prices is not sufficient to exclude that the industry is at a collusive equilibrium. Rather, price wars simply are the indispensable element of a collusive strategy when rivals' prices and market demand realisations are unobservable. $ ^{10} $

Since observability of prices and quantities helps firms to reach the most collusive outcomes (under perfect observability, price wars that are costly for the firms would not occur), competition policy should pay special attention to practices that help firms monitor each other's behaviour. One example of such a practice is given by information exchange agreements, that is being discussed next. In section 2.3.3, I shall also address other pricing practices that increase observability of firms' actions, such as resale price maintenance and best price clauses.

Information exchange, I: Data on past or current prices and quantities It is often the case that via trade associations or in other ways, firms in a given industry exchange data on prices, quantities, or other variables such as capacities, customer demand, cost and so on. In the light of the discussion above, it becomes important to identify the collusive potential of such communications among firms. $ ^{11} $

First, we have seen above that exchange of information on past prices and quantities (or of verifiable information on prices and quantities set in the current period) of each individual firm facilitates collusion, as it allows to identify deviators and better target market punishments, that become then more effective and less costly for the punishing firms.

In the absence of disaggregate information on past prices and quantities, availability of more precise estimates of aggregate (market) demand would also help, as it allows firms to see whether a decrease in individual demand is due to cheating of rivals or to a negative shock in market demand. In turn, this implies that there would be no need for punishment phases which are triggered not by deviations but by a general decrease of market demand. $ ^{12} $
Exchange of information about past (and current) prices and quantities helps firms sustain collusion, but it is possible that there might also be efficiency effects behind exchange of such data. For instance, better information about demand might allow firms to increase production in markets, times, and areas where demand is higher. The literature on information exchange has ambiguous findings. $ ^{13} $ Theoretically, it is possible in certain circumstances that exchanging information helps welfare. However, it is unlikely that firms need to exchange individual and disaggregate data in order to achieve whatever efficiency there might be. Kühn (2001) also argues that information about the industry might help firms devise incentive schemes for their personnel, based on relative productivity, but again, for such schemes to work firms do not need detailed data at a disaggregate level. $ ^{14} $

Kühn (2001) convincingly concludes that while both types of information exchange help firms to collude, the observation of past and present quantities and prices of firms is a more effective collusive device than the exchange of private information about market demand. Further, if efficiency gains of information exchange exist, they would be reaped already with the exchange of aggregate data. This should lead competition policy to a more severe treatment of agreements concerning exchange of information about individual prices and quantities (especially the more disaggregate and the more recent). Indeed, his conclusion that communication between firms about such individual firm data should be forbidden is compelling.

#### 2.3.2 Coordination issues: The role of communication

When firms repeatedly meet in the marketplace, if the discount factor is large enough, any price between marginal cost and fully collusive price might be sustained. This raises the issue of which price is likely to arise as the market outcome. Habit, history, or particular events might provide firms with a focal point on which to coordinate.

Consider for instance a situation where two firms are told by a regulator that their prices cannot be higher than a certain level, say 100. In this case, this price will provide a clear benchmark (the focal point) for the firms, and one can bet that 100 will be the price that they will set. $ ^{15} $
History might also provide hints. Many European markets have been protected from foreign competition for a long time, resulting in several national monopolies in many industries. Once tariff and non-tariff barriers started to fall, this created a potentially pan-European market. However, a situation where each firm stays in its own market without entering foreign ones would provide a good collusive equilibrium, which is just the continuation of something which has happened for a long time. Instead, starting to export might be considered a deviation and might trigger a retaliation in the home market, with rivals exporting in turn. Therefore, the status quo might be a focal point, and only when demand and technology conditions substantially change, might firms be tempted to break the current situation. $ ^{16} $

Whatever the reason, if firms have coordinated in the past on a certain collusive price or divided markets in a certain way, it might be too risky for them to experiment so as to change it. Firms might simply update such a price more or less mechanically with inflation or when raw materials commonly used in the industry become more expensive.

If firms were colluding explicitly they would simply communicate with each other and they could achieve higher collusive prices (provided that firms are symmetric enough, they would have similar preferences over prices), and/or more efficient market sharing rules. But even if they did not overtly collude, they could still try to overcome coordination problems by transmitting information to each other, as I discuss in what follows.

Information exchange, II: Announcements of future prices Announcement of future prices (or production plans) might help collusion, in that it might allow firms to better coordinate on a particular equilibrium among all the possible ones. $ ^{17} $ Farrell (1987) was the first to show the role of non-binding and non-verifiable communication (known as “cheap talk”) in achieving coordination among players in games with multiple equilibria. $ ^{18} $ Since then, both theory and experimental evidence seem to indicate that announcements about price intentions might help firms to coordinate, although not under all circumstances. $ ^{19} $

However, not all announcements about future actions should be treated in the same way. One should distinguish two different situations, according to whom the announcements are directed to: (1) “private” announcements directed
to competitors only (these include communication in auctions); (2) “public” announcements with commitment value to consumers.

“Private” announcements In the first case, announcements are directed to competitors only. To help fix ideas, think of a firm sending a fax to rivals where it is stated that from next month it intends to set a certain price. As Kühn (2001) remarks, it is hard to imagine any efficiency reason behind such announcements. Most likely, they just help rivals to coordinate on a particular collusive price, and therefore helps them collude by avoiding costly periods of price wars and price instability.

Advance notice of price changes, as long as it does not fully commit the firm to the price announced, might also be a tool to avoid costly experimentation with the market. $ ^{20} $ A firm might announce a price increase effective, say, in 60 days, but then revert to the current price if the other firms did not follow suit with similar announcements of price changes. $ ^{21} $ This way, firms might arrive at a commonly agreed price without incurring the risk of losing market shares or triggering price wars during the period of adjustment to the new prices. $ ^{22} $

“Public” announcements In the second case, price announcements are public, and therefore seen by rival firms as well as consumers. Think for instance of a firm advertising the prices of its products in newspapers. On the one hand, it might be argued that transparency of prices still helps collusion, for the reasons indicated above. On the other hand, though, market transparency is good for consumers, as it allows them to “shop around” for the best offer. The latter positive effect is generally considered stronger than the collusive effects of the announcements. Both theoretical arguments and empirical evidence suggest that price advertising in this sense is generally beneficial and brings prices down. $ ^{23} $ Therefore, when prices are “transparent” for both consumers and firms, this should not be considered as an anti-competitive practice.

To conclude, whereas announcements directed to rivals only should be forbidden, announcements about current and future prices which carry commitment value vis-a-vis consumers should be regarded as welfare enhancing.
#### 2.3.3 Pricing rules and contracts

Firms might be able to write contracts and adopt pricing rules that help them sustain collusion. In what follows, I will briefly discuss some examples of such practices.

Meeting-competition clauses state that if the buyer receives a better price offer from another seller, the current seller will match that price. $ ^{24} $ In this case, the potential for collusion is high, and twofold. First, the clause works as a device to exchange information: whenever a buyer is offered a better price, it will have an incentive to report that information to the current seller. This will make firms immediately aware of a deviation from a collusive outcome in the industry, and we know that timely detection of deviations is a crucial element for collusion. Second, the clause reduces the incentives to deviate in the first place: if rivals can retain their current customers due to a meeting-competition clause, the price decrease can only attract new buyers, but cannot steal existing buyers from other firms.

Meeting-competition clauses might have efficiency explanations, $ ^{25} $ but the pro-collusive impact of meeting-competition clauses seems so strong that anti-trust agencies should probably put them under a per se prohibition rule.

Resale price maintenance (RPM) is a vertical agreement whereby a manufacturer imposes upon its retailer(s) the price at which the good should be sold in the final market. There are a number of reasons why RPM can be pro-competitive, $ ^{26} $ but RPM might also facilitate collusion among manufacturers. The intuition is clearly conveyed in the following quote:

“With a competitive retail market and stable retail cost conditions, manufacturers could assume agreed-upon retail prices by fixing their wholesale prices appropriately. In reality, however, variation over time in the costs of retailing would lead to fluctuating retail prices. If wholesale prices are not easily observed by each cartel member, cartel stability would suffer because members would have difficulty distinguishing changes in retail prices that were caused by cost changes from cheating on the cartel. RPM can enhance cartel stability by eliminating the retail price variation.” $ ^{27} $

Jullien and Rey (2001) have recently formalised this argument, and showed that indeed RPM allows manufacturers to better identify deviations from a collusive action, as the quote above suggested, and therefore to better sustain collusion.
Uniform delivered prices might also facilitate price observability among rivals. Consider a situation where producers are located in different geographic areas, and serve consumers that are also spread out over the territory. In these circumstances, it might be difficult for firms to compare prices and to detect price changes, since prices vary with transportation costs. Under uniform delivered pricing, a firm would set the same price inclusive of transportation cost throughout its territory, and independent of the customers' locations. Somebody located next to a firm's plant would pay exactly the same as somebody located hundreds of kilometres away. The practice, however, would make it much easier for competitors to check the prices charged to the clients, thereby fostering collusion. $ ^{28} $

## 3 Fighting cartels: the EU experience

In this Section, I will briefly describe cartel law in the European Union, and the way it has been enforced by the European Commission (EC), which is an administrative authority whose decisions can be appealed to the European Community Courts, i.e., the Court of First Instance (CFI) and the European Court of Justice (ECJ). $ ^{29} $

I will first briefly describe the legal framework and the general enforcement of the law, and I will then turn to some substantial issues, such as how the EU case-law has dealt with the standards of proving collusive infringement.

### 3.1 Legal framework

The main EU law provision on cartels is represented by article 81 of the EC Treaty, $ ^{30} $ which recites:

(1) The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment;
perceived beneficial elements may exceptionally be authorised by the European Commission.

For instance, the Commission has granted exemptions from competition rules for so-called crisis cartels - namely, agreements where firms engage in reciprocal reductions in capacity and output - provided such reductions in over-capacity are permanent, favour specialisation and are implemented in such a way that they minimise the social costs of the unemployment which results from the cutback of production (Goyder, 1993: 162-165). Here, the EC has considered that competition can be sacrificed to avoid the social costs that industry restructuring left to the market would cause. $ ^{31} $

Another example where a restrictive agreement has been allowed because of perceived environmental gains is provided by the CECED decision, concerning an agreement among producers and importers of washing machines which together account for more than 95% of European sales. The agreement aims among other things at discontinuing production and imports of the least energy-efficient washing machines, which represent some 10-11% of current EC sales. The agreement removes one of the dimensions along which sellers compete, and as such it might negatively affect competition and increase prices (as a general rule, the most polluting machines are also the least expensive ones). However, the Commission considered that the agreement will benefit society in environmental terms, allowing to reduce energy consumption, and that such an objective would not have been attained without the agreement. This is because consumers do not properly take into account all the externalities involved in their purchase and consumption decisions, and firms would not give up a tool of market competition unless bound by an agreement.

A final example of the same nature is given by agreements of shipping conferences, which have benefited for a long time from a block exemption (at the moment of writing, the EC is to decide whether to renew the block exemption regulation or not). By virtue of this exemption, ship-owners have been able to operate as a cartel along some specific routes: according to the EC, the counterpart of the cartel should have been the establishment of stable and certain shipping services.

Apart from the aforementioned cases which are to some extent exceptional and which arguably are only partly collusive, the EC (and the European Courts) have been unambiguous towards cartels, and have consistently found them illegal since the early cases (such as the Quinine cartel and the Dyestuffs cartel, both decisions dating from 1969).

Enforcement of cartel law As indicated above, the EC is the main enforcer of the law against cartels in the EU. The EC’s powers are established by Regulation 1/2003 (which replaces Regulation 17/1962). The EC has extensive investigatory powers, which include the possibility to conduct inspections not