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Research shows that under certain market conditions, price cartels arise naturally without collusion

January 21, 2012

Recently reported in the MIT Technology Review was the results of research modeling billions of interactions between buyers and sellers. The data would appear to undermine the argument used to defend invasive regulation, price-fixing, and anti-trust laws, which operate under the assumption that all inconvenient price increases must be the result of shady conspiracies by industry leaders.

The results make interesting reading. It turns out that a crucial factor is the speed at which buyers and sellers react to the market. When buyers react quickest, sellers are forced to match the best possible value for money and prices tend to drop. By contrast, when sellers react quickest, they are quick to copy others offering poor value for money. This reduces the number of sellers offering good value for money in a vicious cycle that drives prices as high as possible. This is the emergence of a cartel and it happens in these guys’ model without any collusion between sellers. Instead, it is an emergent property of the market place that happens when the sellers outperform buyers in the way they react to market conditions. “This cartel organization is not due to an explicit collusion among agents; instead it arises spontaneously from the maximization of the individual payoffs,” say Peixoto and Bornholdt.

I particularly loved the echoes of “Spontaneous Order” in this quote. Of course, the writers of this particular article are still scratching their heads, unable to conceive of a world without regulatory and punitive market controls. Simply leaving market agents alone would be too radical, but at least they acknowledge that even new strategies would still be subject to the law of unintended consequences:

But this work muddies the waters somewhat. If cartel-like behaviour is an emergent property of an ordinary market, how should it be controlled, regulated and punished? The good news is that various strategies could easily be tested using this kind of agent-based model. The bad is that new strategies may themselves lead to emergent properties that are hard to spot in advance.

The abstract is available at the Cornell University Library. Here’s a direct link to the PDF of the paper published by Tiago P. Peixoto and Stefan Bornholdt of the Institute for Theoretical Physics in Bremen, Germany: No need for conspiracy: Self-organized cartel formation in a modified trust game

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