HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR (C.G)

Competition Law
“Game Theory and Competition Law
Submitted To-
Mr. Mohammad Atif Khan
Faculty, Competition Law (Opt. I)
Submitted by-
Diptimaan Kumar
Sem. IX Sec B
Roll no 61

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 ACKNOWLEDGEMENTS

I feel highly elated to work on the topic “Game Theory and Competition Law”

The practical realization of this project has obligated the assistance of many persons. I express
my deepest regard and gratitude for Mr. Mohammad Atif Khan, Faculty of Competition Law.
His consistent supervision, constant inspiration and invaluable guidance have been of immense
help in understanding and carrying out the nuances of the project.

I take this opportunity to also thank the University and the Hon. Vice Chancellor for providing
extensive database resources in the library and through the internet.

Some printing errors might have crept in, which are deeply regretted. I would be grateful to
receive comments and suggestions to further improve the project.

Diptimaan Kumar

Semester IX

Roll No. 61

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CONTENTS
1. Introduction...................................................................................................................(4)

2 Objective and Research Methodology………………………………………………..(5)

3 Game Theory Essentials…………………………………………….............................(6)

4. Competition and Non-Cooperative Game………………………………………….....(8)

5. Effect of strategic interdependence on price fixing………………...............................(10)

6 Effect of Communication on Competition…………………………….........................(12)

7 Game Theory Conclusions………………………… ……………………………….....(16)

8. Limitation of game theory.............................................................................................(19)

9. Conclusion………………………………………………..…………………………..(21)

10 References……………………………………………………………………………(23)

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 INTRODUCTION

Advances in technology have greatly reduced communications costs. Businesses are often able,
at low cost, to make information available to consumers and investors and, either advertently or
inadvertently, to competitors as well. This ease of dissemination and resultant proliferation of
information makes antitrust policy towards communication among competitors of growing
importance.

Direct and indirect communication among competitors often is attacked under Section 1 of the
Sherman Act. In some cases, plaintiffs attempt to characterize practices centered upon
informational activities as constituting an illegal "agreement" to which the "per se" rule against
price fixing should apply. However, most information cases are simply not amenable to
straightforward applications of the per se rule. The rationale underlying the per se rule against
price fixing is the judicial economy associated with the condemnation of practices so
"economically pernicious" and so lacking in any "redeeming social virtue" that their complete
elimination is highly unlikely to hinder socially productive practices. This rationale is not
applicable to most information cases

Game theory helps in determining the behavior of competitors in the market. The components of
the theory gives the background of players making associations for pay offs. The concepts of
theory can help us in knowing what would be the probable effect of the moves of the players on
other players and on the player, itself. It also helps in determining various payoffs to each player
in the market. Further, market structure is also determined by the propositions of the theory. In
further sections we would deal with the effect of the components on competitive practices.

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 OBJECTIVE

● To study what is game theory

● To examine the application of game theory in economical behavior
● To know its relationship with Competition Law

RESEARCH METHODOLOGY

The research work is Doctrinal in nature. It is of analytical descriptive type. No empirical

approach has been used. Secondary sources such as books, articles/ journals are referred while
making this project.

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 GAME THEORY ESSENTIALS

Game theory is "the study of mathematical models of conflict and cooperation between
intelligent rational decision-makers1. Game theory is mainly used in economics, political science,
and psychology, as well as logic, computer science, biology and poker. Originally, it addressed
zero-sum games, in which one person's gains result in losses for the other participants. Today,
game theory applies to a wide range of behavioral relations, and is now an umbrella term for the
science of logical decision making in humans, animals, and computers.

The games studied in game theory are well-defined mathematical objects. To be fully defined, a
game must specify the following elements: the players of the game, the information and actions
available to each player at each decision point, and the payoffs for each outcome. 2 A game
theorist typically uses these elements, along with a solution concept of their choosing, to deduce
a set of equilibrium strategies for each player such that, when these strategies are employed, no
player can profit by unilaterally deviating from their strategy. These equilibrium strategies
determine an equilibrium to the game—a stable state in which either one outcome occurs or a set
of outcomes occur with known probability.

Game types-

● Cooperative and Non-Cooperative

A game is cooperative if the players are able to form binding commitments externally
enforced (e.g. through contract law). A game is non-cooperative if players cannot form
alliances or if all agreements need to be self-enforcing (e.g. through credible threats)3

Cooperative games are often analyzed through the framework of cooperative game theory,
which focuses on predicting which coalitions will form, the joint actions that groups take and

1
Myerson, Roger B. (1991). Game Theory: Analysis of Conflict, Harvard University Press, p. 1
2
Eric Rasmusen (2007). Games and Information, 4th ed. Pg 27
3
David M. Kreps (1990). Game Theory and Economic Modelling pg 35
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 the resulting collective payoffs. It is opposed to the traditional non-cooperative game theory
which focuses on predicting individual players' actions and payoffs.

● Zero Sum
Zero-sum games are a special case of constant-sum games, in which choices by players can
neither increase nor decrease the available resources. In zero-sum games the total benefit to
all players in the game, for every combination of strategies, always adds to zero (more
informally, a player benefits only at the equal expense of others4

● Symmetric and Asymmetric

A symmetric game is a game where the payoffs for playing a particular strategy depend only
on the other strategies employed, not on who is playing them. If the identities of the players
can be changed without changing the payoff to the strategies, then a game is symmetric.
Many of the commonly studied 2×2 games are symmetric

Most commonly studied asymmetric games are games where there are not identical strategy
sets for both players. For instance, the ultimatum game and similarly the dictator game have
different strategies for each player

These models yield insights into how different forms of communication can affect
competition in a market. We analyze the following factors in assessing the effect of the
communication on competition: recipients--competitors or competitors and customers;
timing-historical actions and outcomes, current actions and market conditions, or future
actions; and frequency---repeated or not. Our analysis in this paper points to the potential
mechanisms by which the communication may affect market outcomes. Application of the
rule of reason would necessarily include an analysis of many facts and factors including,
importantly, the actual effects of the specific communication practices at issue in the specific

4
Owen, Guillermo (1995). Game Theory: Third Edition. Bingley: Emerald Group Publishing. p. 11.
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 market in which they occur. Our analysis derives sets of conditions under which an effect on
competitive outcomes is consistent with economic reasoning5

COMPETITION AND NON-COOPERATIVE GAME

Modem industrial organization, with its use of game theory, has much to say about the
potential effects of communication on outcomes. No court will enforce a price-fixing contract,
and this was generally true in the United States even before the passage of the Sherman Act6

Therefore, to have any incremental effect, the Sherman Act must attack something other than
written cartel contracts that already were unenforceable. One obvious added incremental effect
was to turn such behavior into a crime and to give all direct consumers a treble damage claim
for all injuries caused "by reason of' price-fixing.

In any event, however, our central point is that any behavior which arises from
interdependence and which cannot be enforced by contract, must be largely "self-enforcing" to
raise any practical concern. That is, it must be in the interest of each party to any cartel to take
agreed upon actions independent of legal recourse by the other parties to compel performance
or the cartel will disintegrate. If this was not the case, a party could behave opportunistically,
and there would be nothing the other parties could do about it, generally leading to no effect
from interdependence or even an express cartel.

A common interpretation of the basic solution concept in game theory-Nash equilibrium-is that
it represents a form of "self-enforcing agreement." A Nash equilibrium is simply a set of
strategies such that each player's strategy is optimal given that other players choose their
optimal strategies. Therefore, a "self-enforcing agreement" is equivalent to a Nash equilibrium.
If the players were to get together prior to playing a game to agree on strategies to play but

5
Andrew M. Rosenfield ,Communication among Competitors: Game Theory and Antitrust Application of Game
Theory to Antitrust, University of Chicago Law School, Pg 425
6
Craft v. MeConoughy, 79 111. 346 (1875); Richard A. Epstein, Intentional Harms, 4 J.Legal Stud.. 391, 442 (1975).
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 were unable to write enforceable contracts, the set of agreements they could reach defines the
Nash equilibria of the game. But even if the players did not get together beforehand, a Nash
equilibrium represents a standard assumed outcome of game theory. The relevant question for
us is whether there is a difference between the two equilibria7

If Nash equilibrium provides a good prediction of outcomes in strategic settings, then the
Nash equilibrium that emerges in the "competitors do not communicate" setting and the one
that emerges if they do communicate prior to playing the game is the precise measure of the
effect of the communication8 Market outcomes, compared and contrasted with textbook
indicia of perfectly competitive conditions, often are used as circumstantial evidence of
"illegal agreement" in Section litigation. 9

If the outcome with no communication is the same as the one with express price fixing, one
must treat such evidence as of very little probative value. The link between Nash equilibrium
and self-enforcing agreements suggests that, in many settings, communication without an
ability to write a legally enforceable contract is unlikely to have any effect on strategies or
outcomes. The most important way in which communication can affect strategies or
outcomes is that it may transfer information which changes the game the firms play in an
important way. Further we would see how game theory can identify those situations where

7
"Non-Cooperative Game Theory: A User's Guide Manual,' " ch. 11, pp. 423–59
8
There is the issue of how accurate are predictions from game theory. As with any theory based on simplifications,
predictions are unlikely to be precise. It is also possible that players will not choose Nash equilibrium strategies or
that there will be many Nash equilibria, so that the theory may not provide a precise prediction of behavior. Even
though the predictions may not be precise, they still can provide useful guidance on when equilibria may differ

9
Two studies, Dennis A. Yao & Susan S. DeSanti, Game Theory and the Legal Analysis of Tacit Collusion, 38
ANTITRusT BULL. 113, 141 (1993); and Jonathan B. Baker, Two Sherman Act Section 1 Dilemmas: Parallel
Pricing, the Oligopoly Problem, and Contemporary Economic Theory, 38 AIrTrRUST BULL. 143, 219 (1993),
recognize the difficulties in inferring price-fixing from market outcomes
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 communication is most likely to provide competitors with an extra ability to raise prices
which would be relevant in a rule of reason analysis.

THE EFFECT OF STRATEGIC INTERDEPENDENCE ON PRICING

The industrial organization literature shows that oligopolies who understand that their fortunes
are fundamentally interdependent sometimes can achieve high price-cost margins even without
the formation of an express cartel.10 This can occur absent any direct communication among
competitors. A highly-stylized example illustrates this point. A small town has two gasoline
stations. They are located directly across the street from each other at the town's main
intersection and are identical in terms of capacity, ancillary services, and quality of product.
Almost all consumers will therefore buy from the lower-priced station. Prices are posted on
pumps and large electronic signs; they can be changed virtually immediately and costless by
typing in new numbers

If we assume, for the sake of the example, that entry cannot occur, one likely outcome of
"competition" is that each station will charge the price that maximizes joint profits-the same
price they would charge if they could merge. Neither gasoline station has an incentive to cut

10
Vernon L. Smith, 1992. "Game Theory and Experimental Economics: Beginnings and Early Influences," in E. R.
Weintraub, ed., Towards a History of Game Theory, pp. 241–282
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price below the monopoly level. Each realizes that it cannot steal customers from its competitor
before its competitor can respond. And the competitor will respond because it is more profitable
to match the price cut and share the market at a lower price than to permit the price-cutting
station to steal market share. Each station should rationally anticipate immediate matching and,
therefore, not cut price in the first instance.11 Cooperative pricing is thus a logical outcome of the
"game" without any secret meetings or additional communication. If for some reason the joint
profit-maximizing price were to rise, one station could raise price. Although the other station
likes getting all the business, it should know that if it does not raise price to its competitor's level,
the competitor will surely lower price very soon it should even be possible to coordinate a price
increase in this setting." This analysis is certainly not new12

It is very unlikely that this behavior would create antitrust liability for the gas stations and most
people would say that there is no "agreement" between them. Instead, there is what economists
call a recognition on the part of each firm of their "mutual interdependence." In this setting,
unilateral interest, by itself, leads to cooperative pricing. There is however certainly
"communication" between the gas stations. Price information is communicated to competitors
and consumers simultaneously.13 Although the communication may make cooperative pricing
more likely, it is also the case that the information is useful to consumers. This example
demonstrates that cooperation and parallel behaviors are possible without secret communication
about price or output and without "agreements." Immediate communication of prices to
competitors can, therefore, facilitate cooperative pricing.

It is very unclear whether the antitrust laws can or should do anything about cooperative pricing
based on mutual interdependence and collateral interest. Restrictions on posting prices might not

11
Vernon L. Smith, 1992. "Game Theory and Experimental Economics: Beginnings and Early Influences," in E. R.
Weintraub, ed., Towards a History of Game Theory, pp. 241–282.
12
It was discussed by Edward Chamberlin in his classic 1933 book which developed the theory of monopolistic
competition, the theory of monopolistic competition (1933).
13
Vincent P. Crawford (1997). "Theory and Experiment in the Analysis of Strategic Interaction," in Advances in
Economics and Econometrics: Theory and Applications, pp. 206–242. Cambridge. Reprinted in Colin F. Camerer et
al., ed. (2003). Advances in Behavioral Economics, Princeton. 1986–2003
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lead to any improvement in social welfare, because consumers would be poorly informed. 3
Restrictions on price changes may not only eliminate the ability of the gas stations to cooperate,
but also reduce their ability to respond to changes in cost and demand conditions. Moreover, if
we were to treat interdependence that leads to parallel pricing as if it were price-fixing and
therefore illegal per se, entry into a monopolized or oligopoly market likely would become less
attractive. The benefits of entry would likely be foregone because of the entrant's fear of
potential felony exposure and possible treble damage claims in the hands of consumers. A per se
rule against parallel pricing, therefore, could well have perverse dynamic effects on the exercise
of market power and consumer welfare."14

EFFECT OF COMMUNICATION ON COMPETITION

Now we will see how the game-theoretic industrial organization literature suggests at least three
factors that should play a large role in any rule of reason analysis of communication. An
understanding of the mechanisms by which communication may affect outcomes can help courts
fashion rules which address the impact of communication across a variety of competitive
environments.

First, whether or not the communication is public is important because consumers may benefit
from the information externalized. However, this does not mean that the exchange among rivals
of information that is not public should necessarily be subjected to a per se rule-just the opposite.
Despite our suspicions about secret communication among rivals, we would apply the rule of
reason in this context as well.15 This is because even an exchange of private information (e.g., of
cost information) among competitors can reduce the dispersion or even the level of price. This

14
Robert H. Gertner & Andrew M. Rosenfield, Price-Fixing Under the Sherman Act The New Learning from Game
Theory (draft 1996) (on file with author), for a fuller discussion of this and other examples in a general analysis of
the relation of game theory
15
Jean Tirole (1988). The Theory of Industrial Organization, MIT Press., pp. vii–ix
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private exchange of information is not certain to be anticompetitive and, furthermore, consumers
may be uninterested in the information.'

Second, whether the information is about historical or current strategies and outcomes can be
very important. The mechanisms by which communication of information can affect outcomes
differs depending upon what type of information is disseminated.

Finally, the question of repetition and reputation, especially relating to communication of future
actions, may be very important. In many settings, repeated communication may be necessary to
achieve credibility of the information or to make the information useful in facilitating
cooperative pricing. We discuss these issues in some detail below.

Public Communication of Current Market Actions to Both Consumers and Competitors

The enormous declines in the cost of information storage, manipulation, and transmission
continue to transform our economy at an amazingly rapid pace. Information technology is
changing the way numerous goods and services are marketed and sold. Consumers shopping on
computer networks have access to far more information about products, suppliers, and prices
than they could possibly receive through mail-order, physical search, and word-of-mouth. The
same technological advances which lead to better information among consumers also lead to
better information among rival sellers.16 It is impossible to inform consumers electronically
without also informing competitors; if necessary a competitor can always pretend to be a
consumer.

16
Options Games: Balancing the trade-off between flexibility and commitment. Europeanfinancialreview.com last
seen, 22/9/16
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Compare the outcome in the gas station example with the two major auto dealers in the same
town. Although list prices of cars may be observable by rivals, since each sale involves
significant interactions between17However, if the information is secretly transmitted to rivals in
order to prevent consumers from acting upon the information (e.g., buying from the lower priced
firm), then that could be troubling seller and the buyer, the possibility of negotiated prices is real.
It becomes impossible for competitors to determine a rival's transaction prices and therefore, it
becomes difficult to ascertain whether or not a rival is undercutting a cooperative price

Since it is difficult to detect cheating, it becomes more difficult to enforce cooperative pricing.
For example, a seller may mistakenly believe when its sales decline that a rival has undercut
price and may respond with a price cut of its own. Imperfect information among sellers, costly
price changes, or long-term commitments to prices all make it more difficult for firms to
coordinate pricing at non-competitive levels. The theoretical literature analyzing the
circumstances fostering coordination includes Stigler's classic article followed by a large amount
of game-theoretic literature which refines Stigler's insights 18. The main factors which affect the
ability of an industry to sustain cooperative pricing include reaction times, extent of incomplete
information, industry concentration, and asymmetries among the firms. A decision by one firm to
post list prices electronically, which its competitor follows, may help transform the industry to
one where competition looks like the gas station example. Thus, communication can have, at
least theoretically, an anticompetitive effect. This is no more powerful than saying that telephony
can be "anticompetitive" because it might enhance express collusion.

Since it may be impossible to communicate with consumers without communicating with

competitors, the welfare impact of communication is ambiguous. Hence, the mere possibility of
an anticompetitive effect is not sufficient justification for an argument that posting prices

17
., Richard Posner, Information and Antitrust: Reflections on the Gypsum and Engineers Decisions, 67 GEO. L.J.
1187, 1187-91 (1979).
18
Nisan, Noam; Ronen, Amir (2001), "Algorithmic Mechanism Design" (PDF), Games and Economic Behavior, 35 (1–
2): 166–196
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electronically is, or ought to be, illegal per se. In fact, communication with consumers is
typically pro-competitive; competition prospers when consumers are fully-informed.19

Consumers who can find out about competitor's prices, product selection, and delivery and
service policies, are more likely to make an informed choice. A store which is more attractive to
a consumer because it has lower prices is more likely to succeed in a market where consumers
can become informed at low cost. This is exactly how competition is supposed to work. A new
entrant may compete more effectively if it can communicate to consumers 20

In general, empirical studies support the proposition that bans on price advertisements harm
consumers In turn, this may encourage entry and its corresponding procompetitive effects. On-
line bookstores, CD retailers, and computer retailers are providing real competition to
community retailers. The anticompetitive effects described above are merely possibilities. For
instance, it is possible that competing firms were pricing cooperatively prior to communicating
prices and availability. Then, the only incremental effects are procompetitive.

It is also possible that sharing information has no incremental effect on prices because, under
both regimes, prices are constrained by potential entry, buyer bargaining power, and substitute
products. Electronic communication with consumers could make it easier to cut prices secretly,
not more difficult. For example, it may be possible for a consumer to play competitors off
against one another when getting price quotes through electronic mail and make offers and
counteroffers among a large number of sellers at very low cost. If electronic haggling becomes
important, it will be more difficult for competing firms to know what prices rivals are charging
and, thus, cooperative outcomes become less likely. These arguments should make clear that a
careful analysis, rich in industry structure and practice, which employs all available data would

19
Maurizi, The Effect of Laws Against Price Advertising:The Case of Retail Gasoline, 10 W. ECON. J. 321, 329 (1972);
20
' George Stigler, A Theory of Oligopoly, 72 J. POL. ECON. 44, 61 (1964).
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be necessary to determine if the net incremental effects, if any, of particular information sharing
is beneficial or harmful to consumers.

GAME THEORY CONCLUSIONS-

There are a number of general conclusions that can be drawn from non-cooperative game theory
when addressing the question of whether companies in an oligopolistic market are likely to
collude or not. In this section would like to draw attention to three main conclusions as, within
the logic of game theory, they have certain policy implications:

1) In a non-cooperative game, like the prisoner's dilemma, collusion will not occur if the players
know which period will be the last, in other words when the number of periods in the game is
known and limited. It is in case the number is not known or is infinite that a collusive
equilibrium is possible. Backward induction explains this result. In a one period prisoners
dilemma type non cooperative game the best strategy for each player will be not to cooperate.
This means that in a multi-period game it is rational for both players not to cooperate in the last
period. Given the certainty that both will not cooperate in the last period it is also not rational to
cooperate in the pre-last period, as there can be no reward in terms of cooperation in the last
period etc.21

2) In a non-cooperative game with an unknown or infinite number of periods players might come
to a collusive outcome. The question whether the players can and do communicate, in the sense
of trying to get to a non-binding agreement on their respective strategies, is fairly irrelevant22.
This type of communication does not change the choice of each player best strategy. Promises of

21
R. Aumann and S. Hart, ed. (1992, 2002). Handbook of Game Theory with Economic Applications v. 1, ch. 3–6
22
Colin F. Camerer (2003). Behavioral Game Theory: Experiments in Strategic Interaction, pp. 5–7
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a player that he will play a cooperative strategy while this is not his best choice are just 'cheap
talk'

3) The advantage a player can obtain by not cooperating while the others do cooperate
(sometimes called cheating, defecting or free riding). This incentive to free ride depends on the
difference with the result the player obtains under a situation that everyone cooperates. This is
reflected in the pay-off matrix. The incentive to free ride will be weighed by each player against
the possibilities and rationality to punish possible defectors. The players may try to reduce for all
players the attractiveness of free riding by limiting the time or scope of possible free riding
and/or increase the possibilities of punishment.

One of the ways this may done is by exchanging information. Accepting the logic and
assumptions underlying non-cooperative game theory a number of implications for competition
policy can be deducted from the above-mentioned conclusions.

One should be aware that the words defecting and cheating do not refer to the breaking of a
binding agreement.23 It is not even necessary for there to be a non-binding agreement. It refers to
choosing the individual best strategy to the detriment of the collective best outcome. The
punishment strategy that is chosen by the players influences the pay-off that results after the
cheating has been found out. As the question of the best punishment strategy seems still
unresolved this is not discussed further here. These policy implications will be treated next.
However, it cannot be stressed enough that these implications cannot be accepted as such. They
need qualification in the light of the limited applicability of game theory.

First implication

Do not worry about markets when a limited number of contracts can be won

The first implication, related to the first conclusion described above, is that in competition cases
a clear distinction has to be made between markets where the oligopolists meet a distinct number

23
Ch. 5 in R. Schmalensee and R. Willig (eds.), Handbook of Industrial Organisation, Vol. 1, Amsterdam, North-
Holland. Pg 7
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of times while bidding for contracts/fighting over clients and markets where the number is
unknown or infinite. While the second type of market may be the predominant type, the first type
may occur in instances where the product has a short life cycle or where in the foreseeable future
only a limited number of contracts will be divided. The latter may be the case for example for
certain large public works. In these cases, game theory leads to the conclusion that rational
operating companies will not collude. This means that competition authorities have an argument
to spend less resources on these sectors. In case a competition authority none the less still
supposes that collusion is at hand it needs to argue that the basic assumptions underlying non-
cooperative game theory are not applicable in this case.24

Second implication:

Do not worry about communication on future behavior

The second implication, not so widely understood yet it seems, is that the traditional distinction
made in competition policy between explicit and tacit collusion -whether or not there is explicit
communication on price or output strategy- is not relevant from a game theoretical point of view.
The difference is just 'cheap talk'.

Whether companies do or do not come together in smoke filled back rooms to hammer out an
agreement detailing how much each will produce and what price will be charged, this will not
change their incentives to cooperate or defect and will therefore not change their best strategy.
What is important on the one hand is the punishment strategy that will be followed, but here too
communication is not relevant; communication ex-ante does not increase the credibility and
communication ex-post violates renegotiation proofness. What is important on the other hand is
the relative incentives to defect and cooperate (the pay-off matrix), but communication on
planned prices or output will not change these. Within a game theoretical analysis
communication on how much to produce or what price to charge can only help companies, once
cooperation is already everyone's best strategy, to determine and choose between the different
collusive equilibria that are possible.

24
There may be good reasons to argue contrary to this implication as in practice the sector of public works is
traditionally one of the sectors where most cartels are concluded
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What does this mean for competition authorities when assessing companies that actually
communicate on planned prices, output or customer sharing? Firstly, it means that this
communication itself does not lead to collusion. When the pay-off matrix is such that, with the
help of a credible punishment strategy, parallel behavior is the logical outcome anyhow, then
communication just helps to determine and choose between collusive outcomes. It is only in as
far as communication may lead to a worse (higher prices etc.) collusive outcome than would
otherwise have been reached or when it increases the stability of collusion that such
communication itself acts as a competition restriction

LIMITS TO THE APPLICABILITY OF GAME THEORY

As already mentioned in the introduction, a competition authority may have its reasons to
assume that the prisoner's dilemma type non-cooperative game setting may not apply in a certain
case. Three reasons can be put forward to justify this approach. The first is that the situation
conforms to a cooperative game setting. This is especially relevant for state owned or regulated
sectors, where the state may be able to impose binding agreements or exert pressure to cooperate.
From a competition policy perspective this means that the problem is one of reconciling different
policies, within one government or between different levels.25

The second reason is that although the setting is one of a non-cooperative game the pay-off
matrix is such that there exists no prisoner's dilemma). This may be relevant for certain very
highly concentrated markets where each firm has such a high market share that collusive
behavior is the dominant strategy even when the game is only played once. In other words, free
riding is no real option26. This type of situation is highly relevant for competition policy,
especially merger policy. Behavioral remedies will not work. One can only try to prevent such

25
Poundstone, W., (1992), Prisoner’s Dilemma, Doubleday, New York. Rees, R., (1993), “Tacit Collusion”, Oxford
Review of Economic Policy, 9, 27-40. Scherer F., and Ross, D., (1990), Industrial Market Structure and Economic
Performance , third edition,
26
Supra Note 7
19 | Page
concentrated markets to come into existence. Once existent only break-up or regulation seem
possible solutions. The role of information exchange as a facilitating device can be attacked
when it can be shown that it leads to a worse collusive equilibrium as would be attained without
the exchange.27

However, as the information exchange does not facilitate the monitoring of each other in these
situations it also falls outside the scope of this paper. The third reason is however highly relevant
for this paper. Although the setting may be one of a non-cooperative game, like the prisoner's
dilemma, companies may behave more as if they are in a cooperative game setting. Companies
may not behave as nakedly rational as noncooperative game theory usually assumes. Social
constraints, moral codes of conduct etc. do influence behavior.

Business ethics may 'command' that oral non-binding agreements are kept; "a man a man, a word
a word". This does not mean necessarily that players act "As a very crude general rule, if evenly
matched firms supply homogeneous products in a well-defined market, they are likely to begin
ignoring their influence on price when their number exceeds ten or twelve." irrationally, it may
also mean that their perspective becomes less 'self-regarding' and more 'other regarding'. From
experiments with the prisoner's dilemma it is known that the narrow 'self-regarding' perspective
is in general not realistic. Already the experiments of Flood and Dresher, at the origin of research
on the prisoner's dilemma in the early fifties, show this.

In a 100-round prisoner's dilemma game they show that even highly qualified players let their
choice, while non-collusion is the dominant strategy, be influenced by emotional considerations
and feelings of revenge and that the players act surprisingly cooperative; in 60 rounds both
cooperated at the same time while only in 14 rounds both defected at the same time. From this it
transpires that in general, companies may show a more cooperative behavior then one can expect
given the underlying prisoner's dilemma type non-cooperative game setting. The consequences
of this for competition policy are threefold. It firstly means that when the number of rounds of
the game are known and limited, collusion may be the outcome. It secondly means that when the

27
Supra note 10
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number of rounds is unknown there will be a higher likelihood of collusion than game theory
would predict.

Thirdly, it means that communication on future prices and output may not be all 'cheap talk';
companies may become rather nervous about their cooperative attitude when there is not enough
communication. Communication may be essential to 'prevent' that companies starting to behave
as rational as the underlying noncooperative game assumes. This means for competition policy
that the advice to act based on a non-cooperative prisoner's dilemma type game setting can be
seen as a sort of minimum policy action to be undertaken. The next step is to compare actual EC
competition policy concerning the exchange of information to this minimum. § 9 EC competition
policy and information

CONCLUSION

at least for now, the rule of reason be the rule of decision in cases involving communication,
especially new forms of information dissemination. Although we do not consider here the full
details of rule of reason analysis, it suffices to say that such inquiries always begin with an
analysis of market power and that the core issues generally include market power, the actual
effect of any challenged practice and an analysis of the likely benefits as well as the costs of all
of the challenged activities under investigation.

We have mentioned a few issues likely to be of particular relevance in information cases-whether

information is public or purely private, the currency of the information and the repetitive nature
of the information. These are general points and the particular effects of information cannot be
ascertained in simple categories.

The use of the rule of reason implies that, as a practical matter, plaintiffs will not be able to argue
that communication itself is proof-either direct or circumstantial-of price-fixing per se. Instead
they will be forced to show that a particular challenged communication practice has an

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anticompetitive effect. That is the procedure we advocate because we are convinced that
communication is so important to the competitive process that broader sanctions would likely
chill competition rather than promote it.

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