Institutional authority and collusion

Abstract

A 'collusion puzzle' exists by which, even though increasing the number of firms reduces the ability to tacitly collude, and leads to a collapse in collusion in experimental markets with three or more firms, in natural markets there are such numbers of firms colluding successfully.We present an experiment showing that, if managers are deferential towards an authority, firms can induce more collusion by delegating production decisions to middle managers and providing suitable informal nudges. This holds not only with two but also with four firms.We are also able to distinguish compliance effects from coordination effects.

Responding to (un)reasonable requests by an authority

“…as a tool to define the norm by which behavior is expected in the experiment. 31 Such requests are effective in inducing greater compliance in a tax payment game (Cadsby et al, 2006), in line with previous work showing that a 'tax frame' induces greater tax payment than a neutral gamble frame of a tax decision (Alm et al, 1992); in a public good game, in terms of inducing greater contribution (Silverman et al, 2014;Sally, 1995); in an obedience game, where subjects are asked to destroy the money of others (Karakostas and Zizzo, 2016); in a dictator game, where asking increases giving (Andreoni and Rao, 2011); and in a Cournot oligopoly setting, where greater collusion is induced (Sonntag and Zizzo, 2015). A non-experimental example of the tendency to defer to authority is Harrington (1988), who provides evidence that firms tend to comply to environmental regulation to a much greater extent than theoretically predicted, that is, even when monitoring is rare, the punishment of the transgressors is unlikely and fines negligible.…”

“…(2014), Karakostas and Zizzo (2016) and Sonntag and Zizzo (2015) of using experimenter demand 30 We also cannot rule out that the trustees did not believe that the trustors' expectations would be affected by the requests. This is however somewhat implausible since, as previously noted, on average trustors did change their behavior as a result of knowing about the requests, and trustees previously played as trustors.…”

“…However, it is plausible that in many cases a customer or external contractor may know, for example, about a company's expectation for customer service or about a company's reputation or ethical code of conduct, which imply a managerial expectation about how the customer or external contractor's company contact will behave towards them. 3 As in Cadsby (2006), Silverman et al (2014) and Sonntag and Zizzo (2015), and as discussed methodologically in Zizzo (2010), we deliberately use experimental demand as a treatment manipulation, i.e., in our study experimental demand is not a confound but rather a tool of the experimental design -in the case of our paper, to study the reasonableness of demands by the manager and alternative managerial strategies. This tool is additionally useful in our context is because it enables an exogenous and systematic manipulation in both the level and the order of the requests.…”

Responding to (Un)Reasonable Requests

“…Our experiment employs the experimental methodology of Cadsby et al (2006), Silverman et al (2014), and Sonntag and Zizzo (2015) of using experimenter demand as a tool to define the norm by which behavior is expected in the experiment. 17 Such requests are effective in inducing greater compliance in a tax payment game (Cadsby et al, 2006), in line with previous work showing that a 'tax frame' induces greater tax payment than a neutral gamble frame of a tax decision (Alm et al, 1992); in a public good game, in terms of inducing greater contribution (Silverman et al, 2014;Sally, 1995); in an obedience game, where subjects are asked to destroy money of others ; and in a Cournot oligopoly setting, where greater collusion is induced (Sonntag and Zizzo, 2015). A nonexperimental example of the tendency to defer to authority is Harrington (1988), who provides evidence that firms tend to comply to environmental regulation to a much greater extent than theoretically predicted, that is, even when monitoring is rare, punishment of the transgressors is unlikely and fines negligible.…”

Algorithmic Price Recommendations and Collusion: Experimental Evidence

“…Our approach is different as an algorithm instead of previous subjects provides the recommendations. Sonntag and Zizzo (2015) consider static quantity requests in a Cournot market game.…”