Friday, April 23, 2010

But What if You Know that they Know that you Know?

Saw an interesting article in the WSJ yesterday, enough that I thought it warranted a quick entry (also because I'm on a bus back home and would rather do this than another 10 minutes of work)

The article details an investigation into potential price fixing between two airlines, Virgin and Cathay Pacific on their UK - Hong Kong route. Basically, they're being investigated to see if they're conspiring to fix prices at a higher level than the normal market clearing rate.

Ok, so that's not necessarily so interesting. They just made a movie about one of the biggest price fixing cases in corporate history (Matt Damon in the Informant!). But judging by the people that went to see it, even that wasn't interesting.

However, this little piece of the article caught my eye.

The OFT (ed: Authority) alleged that through contacts between employees over a number of years, the airlines coordinated strategies on passenger fares through the exchange of sensitive information about pricing and other commercial matters.

The OFT said the matter was brought to its attention by Cathay Pacific under the watchdog's leniency policy, where a company that is the first to report its participation in cartel conduct may qualify for immunity from penalties. Provided it continues to cooperate, the Hong Kong carrier will be immune from any penalty imposed in this case, the OFT added.

What the what?

I find this fascinating.

Basically, if you collude with your competition to screw over your customers, you can get off free if you just rat out your collaborators.

So, which is more ideal for a company???

A) Don't price fix, and avoid risk of penalty, but avoid price fixing profits

B) Price fix, cooperate indefinitely, expose yourself to risk of discovery/penalty and enjoy the benefits of price fixing (important note: along with your competition)


C) Engage in price fixing, enjoy benefits of price fixing for a certain time, and rat out your competition so that they are penalized, but earning immunity from prosecution in the process

You could basically turn your corporation into some kind of super secret double agent, ratting our the evil price fixer for the good of the little guy consumer (note: no one would believe this story in a million years, but the CEO could walk around to the James Bond theme in his/her office and feel cool I guess)

You'd also get the additional profits from screwing the market over, while avoiding penalties that would hurt your competitor.

So why are there not more companies price fixing and turning themselves in???

Alternatives (with my real answer at the bottom):

1 - Corporations play by the rules and don't price fix unless their run by evil super villains (Probability: Extremely Low)

2 - Corporations do price fix, but are so fiendishly evil that they collude without a problem, despite the apparent incentive to deviate (Probability: Low)

3 - If this were a one-shot game, everyone would rat everyone out, right? If the world were to end after one year, and you were trying to make as much profit for your airline before the world ends (note: you'd be a loser, go hang out with your kids!), you would sure rat out your collaborator and expose them to penalties that could help you (e.g., loss of airline route access, financial penalty, etc.). However, this is not a one-shot game, as corporations are designed to outlive all of us.

Thus, an uneasy truce among price fixers, right?

I guess maybe Cathay Pacific thinks the world is about to end...or they just don't care about pissing Virgin off...either way, it's not good for Richard Branson.

But he's a super billionaire, so I'd guess he's cool with it.