Friday, January 11, 2008

Idle cartels

A cartel is an explicit and secretive agreement between rival companies in an oligopolistic market to take joint action so as to reduce effective competition and thus increase each firm's profit margins. Most countries enact competition laws that forbid the formation of cartels. But there are forms of market inefficiencies that can be brought about by the absence of agreement between competitors.

Numerical portability is the ability for a telephone subscriber to switch provider while retaining the line number; this is a very desirable feature, specially in the case of mobile telephony, and it definitely increases the global market utility. The problem is that in order to enjoy numerical portability between operators A and B, both A and B must have a portability agreement and add some costly functionality to their network cores. Therefore, there is no use in only one operator implementing portability, whereas if both operators provide it none will obtain a direct gain: churn would increase, which in principle favors competitive firms, but reducing competition is what cartels are all about. So, inaction here can be seen as a form of "idle cartel".

An idle cartel is not an actual cartel, since it happens without any explicit communication between firms. Even so, some regulation must be introduced by the government so as to avoid formation of idle cartels. Not that the free market's invisible hand is doing a fine job here.

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