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Researchers Uncover New Details On How Business Cartels Work

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Economists probed into the business of cartels and found that, even among members, transparency is not entirely necessary to collude.

In a new paper, researchers suggest that sharing extensive information between firms can help undercut cartels and gain market shares among themselves.

The findings were published in the Journal of Political Economy.

The Importance Of Transparency

It has long been assumed that transparency between businesses involved in a cartel is essential for collusion. If suppliers share information, they can keep the prices of their products high and monitor each other in order to make sure that no one deviates from the agreement.

However, that is not the case. economists Alexander Wolitzky of MIT and Takuo Sugaya of Stanford University found that transparency between businesses is not necessary to collude.

The economists do not deny the fact (proven by several other studies) that some degree of transparency leads to collusion, but there are circumstances that allow less sharing of information to help cartels succeed.

In the study, the economists explained that increased transparency among cartels has three effects: it enables firms involved to monitor each other's activities, it allows them to coordinate prices, but it also lets firms "tailor deviations to current market conditions."

There have been studies claiming that availability of information between involved businesses help cartels maintain their control for prices, but the aforementioned third effect of transparency has not previously been explored.

The findings are supported by empirical evidence. The authors cited the European Commission's crackdown of several cartels, which made a point of limiting transparency among members. Instead, the firms involved only shared industry-wide sales data to collude.

Reconsidering An Important Policy

The researchers hope that their findings could encourage organizations who want to abolish cartels and ensure that the consumers are getting benefits from market competition to rethink the idea that collusion only happens when businesses share information among each other.

"It would be nice to have a very thorough characterization of when more information among cartel members makes colluding easier, and when it makes it harder," Wolitzky stated.

The authors suggest a new model that does not offer a uniform relationship between transparency and collusion. They hope that the behaviors of firms involved in cartels in different circumstances be explored in the future.

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