Competition and Collusion: Opposites Attract

Banks. Oil companies. Grocery stores. All industries that suffer from consistent complaints regarding collusion and price fixing. Interestingly, also dominated by well managed, profitable companies in industries where differentiation is difficult.

And here’s the fascinating insight I came away with today after reading a rather long and mathematically inclined paper by Steven Keen – in any industry dominated by well run companies, the appearance of collusion indicates healthy, profitable competition. Conversely, if an industry dominated by well run companies appears competitive, there are most likely attempts at collusion underway.

Why would this be the case?

It turns out that the profitability of an industry is greatest when companies continuously act to maximize their own profits, without further regard to what their competitors are doing. Yet when this happens, those same companies which are acting with primary regard for their own maximum profit end up moving together, displaying every indication of a collusion.

Petrol prices going up. Bank fees and interest rates. Cost of groceries. We recognize the situations – these are the industries we here frequent calls for ‘Royal Commissions’ or anti-corruption inquiries into. And yet when these do happen, very little is found.

When companies know what other companies are going to do, the tendency is to act at least a bit in your own favor. These little deviances add up, and companies end up chasing each others tails rather than responding to the market signals they should be following.

So.. next time someone suggests that and industry is running too closely together, that something untoward must be going on, consider first whether that industry is dominated by well run companies. If it is well run, their not colluding. If it isn’t – well maybe they are. But you can’t have both.

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About Neocolonial

Ideas. Dreams. Collector of alternative perspectives. Engineering. Education. Politics. Photography. Whatever else catches my attention.
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