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Identifying the Degree of Collusion Under Proportional Reduction

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  • Oleksandr Shcherbakov
  • Naoki Wakamori

Abstract

Proportional reduction is a common cartel practice in which cartel members reduce their output proportionately. We develop a method to quantify this reduction relative to a benchmark market equilibrium scenario and relate the reduction to the traditional conduct parameter. Our measure is continuous, allowing us to have an intuitive interpretation as the “degree of collusion” and nesting the earlier models in the existing literature. Furthermore, our methodology addresses Corts’ (1999) critique by estimating time-varying degree of collusion from a short panel of firm-level observations, exploiting firms’ ex post heterogeneity. We illustrate the method using the Joint Executive Committee railroad cartel data.

Suggested Citation

  • Oleksandr Shcherbakov & Naoki Wakamori, 2017. "Identifying the Degree of Collusion Under Proportional Reduction," Staff Working Papers 17-51, Bank of Canada.
  • Handle: RePEc:bca:bocawp:17-51
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    References listed on IDEAS

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    Keywords

    Econometric and statistical methods; Market structure and pricing;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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