Submitted by – Saagar Chitkara

Grader – Biplap Das

Grade – A

Q. Under what cases is collusion acceptable by the government?

Collusion
Collusion – The act of cooperation by independent market participants to protect participating
members' interest via cartels. It can be exercised through various means but is usually done to
retain dominant position by limiting entrants, increase producers' welfare by maintaining prices
higher than market-clearing prices, or straight forward co-operation to promote a healthy working
environment and discourage major policy reforms that may hurt industry interest.
Cartels are not always illegal and there are various anti-trust agencies around the globe to monitor
unethical practices by such cartels. The laws are ever evolving and it’s an unstable equilibrium
for the following reasons:

• Payouts from cheating may be high in the short-run

• In various countries, the whistleblower policies grant immunity to 1st company, and thus
the company has an incentive to renege.

Cartel Examples
Some of the examples where cartels are formally acknowledged or overlooked by governments
are as follows:

• OPEC
• Asian Racing Organization – Signing the cartel under the good neighbor policy to protect
the participating members’ interest by discouraging offshore bookkeeping. The offshore
bookies have much lower costs and thus can offer significantly better odds. Since betting
is a major source of revenue and upkeep of courses is very high.
• Trade Associations – Associations that provide certifications and influence the companies
to only hire such certified professionals thus indirectly encouraging professionals to
become members.
• Trade Unions – Unionization is legal in many countries. The companies also look the
other way for the following reasons:
o If the labor cost if high and uniform across the industry, the probability of price
competition is low between firms is low.
o The attrition rate can is better managed if wages are uniform and companies can
invest in training and development to benefit themselves in the long-run.
• NRA – National Rifle Association lobbies against various gun control reforms to protect
the interests of the entire supply chain.
The reasons may be varied on why governments allow cartels to function in some of the following
conditions:

• Protecting domestic industries from imports

• Recession
• Fore Majeure – which will force governments to bail-out, instead governments encourage
industries to protect themselves proactively.

Case Analysis
Problem Statement
The cartel example below outlines the various US government policies to encourage travel and
tourism in the US post September 11th. The domestic and international travel to the US had taken
a hard hit and consequently, the travel and tourism industry was badly affected. The write-up
below outlines the collaboration of 20-24 Vegas strip casinos to mitigate revenue loss on account
of a drop in demand.

Analysis
Table 1 outlines the drop in overall revenue in 2002 as compared to a high CAGR in the previous
period1.
Figures in Mn USD 1999 2000 2001 2002 2003 2004
Gaming 8,426 9,309 9,311 8,912 9,250 9,884
Rooms 2,620 3,165 3,467 3,177 3,336 3,822
Food 1,949 2,244 2,381 2,333 2,445 2,681
Beverage 788 900 935 941 984 1,082
Other 1,609 1,939 2,009 1,939 1,963 2,118
Total 15,392 17,557 18,103 17,302 17,978 19,586
CAGR 14.06% 3.11% -4.43% 3.91% 8.94%

Furthermore, gaming accounted for over 50% of the total Casinos revenues as evident from the
table below:
Percent 1999 2000 2001 2002 2003 2004 Average
Gaming 54.7% 53.0% 51.4% 51.5% 51.5% 50.5% 52.1%
Rooms 17.0% 18.0% 19.2% 18.4% 18.6% 19.5% 18.4%
Food 12.7% 12.8% 13.2% 13.5% 13.6% 13.7% 13.2%
Beverage 5.1% 5.1% 5.2% 5.4% 5.5% 5.5% 5.3%
Other 10.5% 11.0% 11.1% 11.2% 10.9% 10.8% 10.9%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

The analysis would be confined to the actions of collaborative actions taken by the casinos on
slot machines. Slot machines accounted for 60%-65% of the total gaming revenue.

Collaborative Action
Slot machines in Vegas are required by law to payout at least 75% of the amount that goes in. To
boost demand, all the casinos on the strip decided to increase it to 95%2 uniformly across all slot
machines. Instead of individual participants moving independently, they joined hands in boosting
demand together. The other winning probabilities on the slot machines are outlined below, which
were also enhanced for a brief period between July 1st, 2002, and June 30th,2003.

1
https://gaming.unlv.edu/reports/NV_departments_historic.pdf
2
http://www.vegastripping.com/playersclub/slots.php#:~:text=Slot%20machines%20in%20Las%20Vegas,Las%20V
egas%20is%20approximately%2095%25.
The US Government encouraged such a collaborative move since such a move would encourage
both domestic and international tourism. International tourism to the US had fallen significantly
due to air travel risks and the restrictive visa policies implemented by the Department of Homeland
Security (DHS).

Conclusion
This collaborative move to entice various consumers to come and spend on the strip did boost
demand and revenue in the short run.