Cooperative Behavior in Horizontal Collusion and Optimal Antitrust Policy in a Dynamic Model with Endogenous Price Setting

Investigating the relationship between competitiveness of the market environment and the degree of price volatility is extremely important in view of the limited number of qualitative indicators of collusion available to antitrust regulators. Existing empirical studies show that collusion between companies to establish and maintain prices, as a rule, is characterized by lower price volatility than competitive forms of market interaction. Thus, this indicator is recommended to use as an indicator of the presence of collusion in the commodity market. However, some commodity markets, by contrast, demonstrate greater price volatility in a non-competitive environment. Modern theoretical models are able to explain this phenomenon, based on the theory of price wars and the stability of the collusion. Nevertheless, these hypotheses lose their explanatory capacity in the conditions of complete information between the participants in the collusion and the lack of time lags in their actions. The present study demonstrates that, with these prerequisites that restrain the incentives of participants in horizontal agreements for noncooperative behavior, the source of price volatility in a market where there is collusion may be the optimal strategic interaction between its participants. This paper provides an argument against using estimates of market price volatility as an indicator indicating horizontal agreements. Also, an applied recommendation for a competitive policy is the extension of the limitation period for breaches of competition law and the storage of financial statements, increasing the internal incentives of the regulator to disclose long-standing violations.