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Collusive Compensation Schemes Aided by Algorithms

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  • Simon Martin
  • Wolfgang Benedikt Schmal

Abstract

Sophisticated collusive compensation schemes such as assigning future market shares or direct transfers are frequently observed in detected cartels. We show formally why these schemes are useful for dampening deviation incentives when colluding firms are temporary asymmetric. The relative attractiveness of each of these schemes is shaped by firms’ ability to predict future market conditions, possibly aided by algorithms. Prices and profits are inverse u-shaped in prediction ability. Assigning future market shares is optimal when prediction ability is intermediate, and otherwise direct transfers are optimal. Competition authority's limited resources should be utilized to respond to these changing market conditions.

Suggested Citation

  • Simon Martin & Wolfgang Benedikt Schmal, 2021. "Collusive Compensation Schemes Aided by Algorithms," CESifo Working Paper Series 9481, CESifo.
    • Handle: RePEc:ces:ceswps:_9481
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    References listed on IDEAS

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    Cited by:

    1. Martin, Simon & Rasch, Alexander, 2022. "Collusion by algorithm: The role of unobserved actions," DICE Discussion Papers 382, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Simon Martin & Alexander Rasch, 2022. "Collusion by Algorithm: The Role of Unobserved Actions," CESifo Working Paper Series 9629, CESifo.
    3. Schmal, Wolfgang Benedikt, 2024. "Polycentric governance in collusive agreements," Freiburg Discussion Papers on Constitutional Economics 24/1, Walter Eucken Institut e.V..

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    More about this item

    Keywords

    algorithmic collusion; market forecasting; prediction ability; firm asymmetry; compensation schemes;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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