DP18056 Relational Collusion in the Colombian Electricity Market
Under collusion, firms deviate from current profit maximization in anticipation of future rewards. As current profit maximization places little restrictions on firms' pricing behaviour, collusive conduct is hard to infer. Under collusion -- however -- firms' behaviour should instantaneously respond to the anticipation of future changes in their ability to sustain it. We show that bids from certain firms in the Colombian wholesale electricity market collapsed immediately after the announcement, and before the implementation, of a reform that potentially made collusion harder to sustain. A forensic analysis uncovers a type of coordinated behaviour among cartel members that likely required explicit communication and provides suggestive evidence that such communication might have occurred. A quantification exercise supports the reduced-form evidence on collusion and quantifies its costs. Dynamic enforcement constraints should be taken seriously by policy-makers fighting collusion.
