How to catch the market collusion using a bit of algebra and public data

A little report on a paper about a collision in the electricity market in the UK.

In the late 1990s, the combination of game theory and econometrics produced new techniques for collision detection. The advantage of this technique is that you just need readily available public data and few simple equations that reasonably captures firms behaviour.

The big picture is that if you know the costs of the firm you can already tell if the prices are way too high.

Some other examples of this approach: 1, 2.

Papers are essentially identical. This new technique is used and then the results compared with more conventional methods, e.g. using cross market variations (by definition require way more data). The bottom line is that this technique works. Hurray.

… and a little aside as per usually. A market is only one case of a social structure where strangers interact, there are many others, e.g. elections, law enforcement. (these social structures are all trust-based technologies, trusting to a stranger, or a piece of paper, is a unique evolutionary feature that observed exclusively in people. It allows us to play non-zero-sum games (cooperate, build states and stuff) and kick butts even if we are physically weaker than most predators in the animal world) What’s nice about markets is that inhere things are sort of black and white, everyone knows what they are doing. Yet, almost any concept that has been designed to capture interaction in a market can be generalised to any other social structure. Few examples. An idea of being small so that you take environment as given, like in, you can’t do anything about it. When you vote for president your single vote is indeed very small to influence the outcome, when you vote within the local community, though, your vote matters a lot and environment is not exogenous at all. An idea of elasticity transcends directly to, for example, the relationship between men and women. If the market is inelastic then you can abuse it. Just like you can abuse a woman that doesn’t have anywhere to go (cool kinda related paper). Yet if there are many more “men” among which a “woman” can choose from then market becomes very elastic and one cannot abuse. Indeed, a lot that happens in the market can be generalised to any other social structure.

Blackandwhiteness of market comes from the fact that everybody kinda aware what game is being played. The problem with other social structures is that people don’t really know what game they really playing. (Crooked politicians, for example, will do everything they can to make sure that people are clueless what they are actually choosing among)  Peoples’ minds have (another evolutionarily developed feature that allows people to form groups) morality that plays a very very important role in social structures, i.e. the notions of right and wrong and their boundaries (more technically they affect believes whether your “high” effort will be supported by other and not taken advantage of). Think about a country where it is customary for men to have way more rights at the expense of the rights of women, it would be very typical to see that women, in fact, are happy to give those rights to men, because they truly believe that their place is in the kitchen or at the lower paid job or something like that. Put differently, social norms very often prevent players from realising what game exactly is being played. Markets in this sense away less “contaminated” by those social norms, yet they are still very much affected. General notions of right and wrong play important roles in market, just like they do in any other social structures. (check this experiment that says that economists are more “rational” (read selfish)) American culture of winner takes it all leads to very aggressive corner solutions by the corporate world, naturally, to offset those the US has a very strong regulatory body.

Think Russians before the 1990s didn’t have any market experience. And when the markets were introduced after the 1990s rules were taken quite literally. Of course, there was a lot of influence of, so-called, market fundamentalists from IMF, which reinforced this idea that since this is capitalism and this is markets you can do everything which is not directly prohibited and even if this prohibited it is in the rules of the game to break the rules if you can.

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