Oligopoly Collusion and Cartel Agreements

Oligopoly Market Characteristics

• The main characteristic of an oligopoly market is the presence of only a few firms that compete with each other.

Collusion

• Collusion occurs when firms in an oligopoly market cooperate to restrict output and raise prices.
• A cartel is a group of firms that collude to achieve a common goal, such as higher prices.

Achieving Collusion

• Firms in oligopoly sometimes achieve collusion by making informal agreements or by forming a cartel.

Consequences of Undercutting

• If one firm undercuts another in an oligopoly market, it can lead to a price war, which can result in lower prices and profits for all firms.

Calculating Monopoly Profits

• There is no formula provided for calculating the share of monopoly profits in an oligopoly market.

Collusion and Monopoly Prices

• Collusion in oligopoly can lead to firms earning monopoly prices, as they restrict output and raise prices.

Reasons for Collusion

• The primary reason behind firms forming collusive agreements in oligopoly markets is to increase profits.

Determining Price

• The factor that determines whether the price in an oligopoly market will be set at monopoly prices or at marginal cost is the level of competition among firms.

Cartel Purpose

• The purpose of a cartel like OPEC is to control oil prices by restricting output and raising prices.

Multimarket Contact and Hospital Competition

• Multimarket contact between hospitals can impact competition, as hospitals may have an incentive to collude to raise prices.

Out-of-Market Consolidation and Hospital Prices

• Out-of-market consolidation can lead to higher hospital prices, as hospitals may have greater bargaining power with insurers.

Hospital Mergers and Bargaining Power

• Hospital mergers can increase a hospital's bargaining power with insurers, leading to higher prices.

Antitrust Investigations

• Antitrust authorities investigate hospital mergers with strong geographic overlap to prevent anti-competitive behavior.

Hospital M&A Deals

• The number of general acute care hospital M&A deals between 2000 and 2014 showed a trend of increasing consolidation.

Consolidation and Prices

• Firms in multihospital systems may experience higher prices due to consolidation, as they have greater bargaining power with insurers.

Estimating Multimarket Contact Effect

• The standard approach in existing empirical literature to estimate the effect of multimarket contact is to use difference-in-differences models.

Identification Concern

• One natural identification concern with existing specifications is that changes in multimarket contact may be driven by other factors that affect prices.

Out-of-Market Consolidation

• Changes in multimarket contact generated by out-of-market consolidation are more plausible for studying the effect on in-market prices.

Difference-in-Differences Models

• Difference-in-differences models compare price trends between hospitals that experience a change in multimarket contact and those that do not.

Studying Multimarket Contact Effect

• The paper uses diff-in-diff models to isolate variation in multimarket contact generated by out-of-market consolidation.

Key Strength

• A key strength of using out-of-market consolidation to study the effect of multimarket contact on prices is that it allows for more accurate estimation.

Bias Concern

• Unobserved factors that affect multimarket contact can bias the estimated effect of multimarket contact on prices.

Weakness

• A weakness identified in the paper is that it does not provide evidence on the underlying mechanisms through which multimarket contact affects prices.

Addressing Endogeneity Concern

• Difference-in-differences models address the endogeneity concern related to multimarket contact by comparing price trends between hospitals that experience a change in multimarket contact and those that do not.

Importance of Out-of-Market Consolidation

• It is important for the paper to consider situations where changes in multimarket contact are generated by out-of-market consolidation to isolate the effect of multimarket contact on prices.

Explore the concept of collusion and cartel agreements in oligopoly markets. Learn how firms in oligopoly engage in collusion to increase market power, and how cartel agreements work as institutional forms of collusion such as OPEC in the oil industry.