Thursday, January 3, 2013

How do you catch price fixers?

The Economist has a piece on using data to uncover cartels.

In a 2006 paper Ms Abrantes-Metz, Luke Froeb of Vanderbilt University, John Geweke of the University of Iowa and Christopher Taylor of the Federal Trade Commission used the price of fish sold to American military bases in the late 1980s to backtest the theory. A cartel had stitched up the market for cod, flounder, haddock and perch. When the cartel reigned, the prices of perch were oddly stable. But when providers began to compete, prices dropped by 16% and also became choppier, reflecting fluctuations in wholesale fish prices (see right-hand chart). A new paper on a generic-medicines cartel in Mexico found something similar.

The magazine actually got the numbers wrong:   after the cartel collapsed, price went down by 23%, but the coefficient of variation (the standard deviation divided by the mean) went up by 263%.

This lead the authors to try to identify conspiracies by low variation.  They didn't find any.

Here is a link to the paper. 

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