Oligopoly Collusion and Cartel Agreements

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Questions and Answers

What is the main characteristic of an oligopoly market?

Two or more companies control the market (correct)

There are many small firms competing

Consumers have the most market power

A single company controls the market

Which of the following best describes collusion?

Open competition between firms to lower prices

Secret agreements between companies to fix prices (correct)

Public announcements of price increases

Individual firms maximizing their own profits

What is a cartel in the context of oligopoly?

An organization that promotes fair competition

A group of companies that refuse to collude

An institutional form of collusion (correct)

An agreement between firms to engage in price wars

How do firms in oligopoly sometimes achieve collusion?

By agreeing amongst themselves to increase and hold market power Signup and view all the answers

What is the consequence of one firm undercutting another in an oligopoly market?

The undercutting firm might get ahead temporarily Signup and view all the answers

What is the formula for calculating the share of monopoly profits in an oligopoly market?

(Profit * 1/2) / (q-discount period) Signup and view all the answers

How can collusion in oligopoly lead to firms earning monopoly prices?

By setting high prices and colluding to maintain those prices Signup and view all the answers

What is the primary reason behind firms forming collusive agreements in oligopoly markets?

'E' representing a small margin of profit Signup and view all the answers

Which factor determines whether the price in an oligopoly market will be set at monopoly prices or at marginal cost?

'Pm - E' Signup and view all the answers

What is the purpose of a cartel like OPEC in controlling oil prices?

Coordinate production levels and pricing strategies. Signup and view all the answers

How does multimarket contact between hospitals impact competition?

Softens competition between hospitals Signup and view all the answers

What effect does out-of-market consolidation have on hospital prices?

Increases hospital prices Signup and view all the answers

How do hospital mergers affect bargaining power with insurers?

Increase bargaining power Signup and view all the answers

Why do antitrust authorities investigate hospital mergers with strong geographic overlap?

To ensure fair competition is maintained Signup and view all the answers

What is the trend observed in the number of general acute care hospital M&A deals between 2000 and 2014?

Increased steadily over the years Signup and view all the answers

In the context of the text, why might firms in multihospital systems experience higher prices due to consolidation?

Due to greater bargaining leverage against insurance companies Signup and view all the answers

What is the standard approach in existing empirical literature to estimate the effect of multimarket contact?

Using market fixed effects Signup and view all the answers

What is one natural identification concern with the existing specifications that exploit within-market variation in multimarket contact over time?

Endogeneity of within-market changes in multimarket contact Signup and view all the answers

What makes changes in multimarket contact generated by out-of-market ownership more plausible for studying the effect on in-market prices?

Orthogonality to unobserved determinants of in-market prices Signup and view all the answers

In the context of the text, what do difference-in-differences models compare regarding price trends?

Hospitals experiencing an increase in multimarket contact due to out-of-market M&A to control hospitals Signup and view all the answers

Why does the paper use diff-in-diff models to isolate variation in multimarket contact generated by out-of-market consolidation?

To address potential endogeneity concerns Signup and view all the answers

What is a key strength of using out-of-market consolidation to study the effect of multimarket contact on prices?

Plausible orthogonality to unobserved determinants of in-market prices Signup and view all the answers

What factor can bias the estimated effect of multimarket contact on prices according to the text?

Management practices at newly acquired hospitals Signup and view all the answers

What is a weakness identified in the paper regarding the evidence of underlying mechanisms through market contact?

Lack of direct evidence Signup and view all the answers

How do difference-in-differences models address the endogeneity concern related to multimarket contact?

By isolating variation from out-of-market M&A Signup and view all the answers

Why is it important for the paper to consider situations where changes in multimarket contact are generated by out-of-market consolidation?

To avoid biases from simultaneous management changes affecting pricing Signup and view all the answers

Study Notes

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.

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Description

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.