Oligopoly: Some Antecedents

1. Economic Antecedents


Fellner contends that it is impossible to deduce determinate prices and outputs for oligopoly markets on the basis of demand and supply functions that are derived from technological data and utility functions ( 1949, pp. 9-11). Rather, fewness carries with it a range of indeterminacy. Thus, although received price theory is useful for establishing the region of indeterminacy, notions of conjectural interdependence are needed to ascertain how choice is made within these limits. As he sees it, “. . . all problems of conjectural interdependence are essentially problems of bargaining — provided we interpret bargaining in the broader sense, including the ‘implicit’ variety” (1949, p. 16).

Within the range of indeterminacy, Fellner identifies four factors which determine relative bargaining power. The first two are concerned with social and political limits on bargaining and need not detain us here. The second two are more situation-specific: the ability of the parties to take and to inflict losses during stalemates: and toughness, in the sense of unwillingness to yield (1949, pp. 27-28).

He notes that quasi-agreements (bargains) will change in response to shifts in relative strength among the parties, and that changing market circumstances make it necessary for oligopolistic rivals to adapt their behavior appropriately (1949, p. 34). Such quasi-agreements, moreover, “do not usually handle all economic variables entering into the determination of aggregate gains” (1949. p. 34). Although this is partly due to “administrative circumstances.” where these are left undefined, “it is largely a consequence also of uncertainty due to which various persons and organizations discount their own future possibilities This is especially true of those variables that require skill and ingenuity in handling (such as those directly connected with advertising, product variation, technological change, and so forth)” (1949, pp. 34-35). Later, he indicates that the use of strategic variables of these kinds requires inventiveness (1949, pp. 183-184), and that “the present value of this future flow of inventiveness cannot be calculated with sufficient accuracy” for the relative strength of the parties to be established (1949. p. 185). This in turn prevents the corresponding quasi-agreement from being reached. As an industry “matures,” however, and particularly if new entrants do not appear, the degree of competition with respect to nonprice variables may be attenuated (1949, pp. 188-189).

Fellner indicates that profit pooling would not be necessary to reach a full-blown, joint-profit maximization result in those oligopolies where (1) the product is undifferentiated and (2) all firms have identical horizontal cost curves (1949, p. 129). In these circumstances, a simple market sharing agreement will suffice to achieve this result. Such conditions, however, represent a very special case. Even here, moreover, there is the need to reach agreement on what adjustments to make to changing demand conditions: who decides? how are differences reconciled?

In the more usual case where cost differences and/or product differ- entiation exist, joint-profit maximization requires interfirm cash flows. Complete pooling under these conditions implies that “no attention is paid to how much profit each participant earns directly on the market but only to how much the aggregate of the participants earns. Each participant is compensated from the pool of earnings according to his share” (1949, p. 135). This, however, is held to be hazardous both for antitrust reasons and, even more, because some firms will be at a “substantial disadvantage if the agreement is terminated and aggressive competition is resumed” (1949, p. 133). Consequently, only qualified joint-profit maximization among oligopolists is to be expected.


Stigler takes as given that oligopolists wish, through collusion, to maxi- mize joint profits (1964, p. 44) and attempts to establish the factors which affect the efficacy of such aspirations. While he admits that “colluding firms must agree upon the price structure appropriate to the transaction classes which they are prepared to recognize” (1964, p. 45), his analysis is focused entirely on the problem of policing such a collusive agreement. “A price structure of some complexity” (1964, p. 48), one which makes “appropriate” provision for heterogeneity among products and buyers and for the condition of entry, is simply imputed to oligopolists.3

Stigler notes that since secret violations of such agreements commonly permit individual members of an oligopoly to gain larger profits (where these are expressed as expected, discounted values) than would their adherence, a mechanism to enforce agreements is needed. Enforcement for Stigler “consists basically of detecting significant deviations from the agreed-upon prices. Once detected, the deviations will tend to disappear because they are no longer secret and will be matched by fellow conspirators if they are not withdrawn” (1964, p. 46). Accordingly, a weak conspiracy is one in which “price cutting is detected only slowly and incompletely” (1964, p. 46).

Since an audit of transaction prices reported by sellers is unlawful, and in any event may be unreliable (1964, p. 47), transaction prices paid by buyers are needed to detect secret price cutting. Stigler contends, in this connection, that statistical inference techniques are the usual way in which such price cutting is discovered. In particular, the basic method of detecting a price cutter is that he is getting business that he would not otherwise obtain (1964, p. 48). Among the implications of this statistical inference approach to oligopoly are that (1) collusion is more effective in markets where buyers correctly report prices tendered (as in government bidding). (2) collusion is limited if the identity of buyers is continuously changing (as in the construction industries). and (3) elsewhere the efficacy of collusion varies inversely with the number of sellers, tne number of buyers, and the proportion of new buyers, but directly with the degree of inequality of seller firm size (1964. pp. 48-56).

2. Legal Antecedents 


Turner contends that conscious parallelism, by itself, does not imply agreement. Additional evidence that the observed parallelism is not simplv “identical but unrelated responses by a group of similarly situated competitors to the same set of economic facts” is needed before agreement can be inferred (1962. p. 658). He illustrates the argument by posing an “extreme hypothetical in which there are only two or three suppliers — each of identical size, producing an identical product at identical costs — and markets are static (1962. p. 663). He contends, in these circumstances, that “the ‘best price for each seller would be precisely the same, would be known to be the same by all. and would be charged without hesitation in absolute certainty that the others would price likewise” (1962, pp. 663-664). Although he is not explicit on this, the price that he appears to have in mind is the joint-profit maximizing ( monopoly) price.4

Turner then goes on to note that the hypothetical is rather unrealistic. Products are rarely fully homogeneous, cost differences will ordinarily exist, and adaptations will need to be made to changing market circumstances (1962, p.664). He accordingly holds that “for a pattern of noncompetitive pricing to emerge . . . requires something which we could, not unreasonably, call a ‘meeting of the minds'” ( 1962. p. 664).5 He declines, however, to regard this as unlawful. Absent explicit collusion, this is merely rational price making in the light of all market facts (1962. p. 666). “If monopoly and monopoly pricing are not unlawful per se, neither should oligopoly and oligopoly pricing, absent agreement of the usual sort, be unlawful per se” ( 1962. pp. 667-668).

Because the behavior in question cannot be rectified by injunction [“What specifically is to be enjoined ?” (1962. p. 669) ], relief would presumably have to take the form of dissolution or divestiture (1962. p. 671). This however, is to admit that the fundamental issue is structure, not remediable conduct. Unless structural monopoly is to be subject to dissolution, structural oligopoly ought presumably to be permitted to stand. Although Turner declined in 1962 to propose a structural remedy for either condition, he has since altered his position on both (1969).


Posner takes exception to Turner’s position that oligopolistic inter- dependence of a natural and noncollusive sort explains the price excesses in oligopolistic industries. Rather, a small-numbers condition is held to be merely a necessary but not a sufficient condition for such price excesses to appear (1969, p. 1571). Because “interdependence theory does not explain . . . how oligopolistic sellers establish a supracompetitive price” (1969. p. 1568), including adjustment to changing market conditions, Posner suggests that the study of oligopoly proceed in terms of cartel theory instead (1969. pp. 1568- 1569).

The basic argument here is that “voluntary actions by the sellers are necessary to translate the rare condition of an oligopoly market into a situation of noncompetitive pricing” (1969, p. 1575). Effective cartel behavior is, moreover, costly to effectuate; costs of bargaining, adaptation, and enforcement must all be incurred (1969, p. 1570). The upshot is that since “tacit collusion or noncompetitive pricing is not inherent in an oligopolistic market structure but, like conventional cartelizing, requires additional, voluntary behavior by sellers” (1969, p. 1570; emphasis added), a conduct remedy under section 1 of the Sherman Act is held to be appropriate (1969, pp. 1578-1593). Once the oligopolist is faced with the prospect of severe penalties for collusion, tacit or otherwise, Posner concludes that the rational oligopolist will commonly decide not to collude but will expand his output until competitive returns are realized (1969, p. 1591). Self- correcting performance is thus induced in this way.

Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.

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