Blog Paul de Bijl: Tacit collusion

Study into the Dutch savings market

ACM’s study into the Dutch savings market (published on May 28) kicked up quite some dust. And yet, nobody seemed truly surprised.

The study followed from a letter to the Dutch House of Representatives sent last year by the Minister of Finance about, among other topics, how the savings rates were lagging behind the ECB interest rate. Last year, over 20 banks with Dutch licenses were active on the savings market, yet a large majority of savers have savings accounts with the three major banks (ABN Amro, ING, and Rabobank). Their combined market share is quite stable. As consumers barely switch to smaller banks with higher savings rates, the larger providers feel little need to raise their interest rates. That is not good for competition.

The study also points out that it is plausible that there is ‘tacit collusion’ between the three major banks: this is a situation where they avoid competing with one another without having actually discussed this among each other. In their reporting on ACM’s study, Dutch media disscussed this term, but also seemed a bit lost about its actual meaning. So on that note, let’s talk about tacit collusion.

What is tacit collusion?

Businesses that compete with one another try to capture market share from each other, for example, by offering lower prices, higher quality, or by making major investments. However, leaving each other alone can also be beneficial, by agreeing not to encroach upon each other’s domains or making life difficult for one another. The Dutch Competition Act prohibits such agreements.

Now, it’s not always necessary to conclude an actual agreement. Without actually needing to say the words, competitors get it that they mutually benefit from peace and quiet, especially in the long run. Add to that the expectation that rivals find out about any disruption caused by others quickly and then follow suit immediately. The spoilsport’s advantage thus quickly evaporates, whereas the market will not automatically revert back to the comfortable, previous situation. A shared understanding that all competitors will be harmed by such a disruption sustains a stable situation similar to a cartel, including the harm to buyers. This is known as tacit collusion.

However, note that the term may put people on the wrong track, since businesses do not explicitly collude. It actually refers to ‘parallel behavior' without any explicit coordination. Imagine a market where one of two different equilibria may come about: one with competitive behavior and one without. Although businesses are not allowed to communicate with each other to reach the second equilibrium, competitors of course monitor each other’s behavior and respond accordingly. The coordination thus takes place without any interaction: implicitly and tacitly.

Is it common?

How often tacit collusion takes place is hard to tell, simply because it is impossible to look inside the minds of managers. Yes, you could ask companies, but their go-to responses usually involve healthy profits for investors, catching up after a bad year, or the feeling of others breathing down their necks (for example Big Tech). Nevertheless, such explanations say little about the plausibility of a scenario where everyone manages to avoid mutual competition.

Economic theory specifies the necessary conditions for tacit collusion. You need a stable market with not too many firms, which are (more or less) similar and offer fairly homogeneous products or services. They must be able to monitor each other’s tactics, otherwise there aren’t any consequences for spoilsports. Another factor is that competitors, entrants, and buyers must be unable to throw such an equilibrium out of balance. Think, for example, of a concentrated market with a supply that is transparent for competitors, switching barriers for buyers, and little entry.

Theory and practice

From the outside, one cannot observe how businesses choose price strategies. On the other hand, managers with commercial responsibility and price-strategy advisors sometimes offer a glimpse behind the scenes. Their starting point is often to expose their margins to as little competition as possible, and not to drop prices when costs go down. You would expect current price levels to offer plenty of opportunities to capture market share with lower prices, but the opposite seems to be the case. Companies often follow each other.

In practice, many companies want to avoid direct competition, although the success of that strategy depends on market conditions. That is a different perspective than those found in common competition models. In the Netherlands, managers sometimes even refer to their counterparts working for competitors as 'conculega's', which is a portmanteau of the Dutch words for competitor ('concurrent') and colleague ('collega'). Slightly stilted yet insightful at the same time.

All of these stories may be cause for concern: from a real-world perspective, tacit collusion seems easier than economic theory suggests. At the same time, a valuable contribution of the theory is that it explains what market conditions make such a market outcome sustainable.

Quantitative empirical studies into tacit collusion are still a bit scarce. Some examples are about the mobile-telecom market in France and the gasoline (petrol) markets in Germany and Italy. On the Dutch gasoline market, gasoline prices go up quite quickly when oil prices go up, yet do not go down as quickly when oil prices drop (see a recent ACM study – in Dutch). Tacit collusion may play a role there.

Academic research warns against digital platforms that share price information and against fast-learning price algorithms. One particularly complicated dilemma concerns price transparency: does it encourage consumers to switch providers more easily, or does it facilitate tacit collusion? When providers already monitor each others’ prices anyway, transparency hopefully still helps buyers switch providers more easily.

Possible solutions

Economists tend to be careful not to brand certain market outcomes as tacit collusion, because of the necessary conditions. Also, the existence of tacit collusion, by definition, cannot be proven in the same way a cartel can be demonstrated using evidence. One can make a plausible case though, by looking at market conditions and ruling out alternative explanations.

The major banks keep a close watch on each other, prefer not to compete on price, and don’t like to lead with increasing savings rates. The recent ACM study seeks to understand the causes behind this lack of competition. The savings market exhibits conditions that are conducive to tacit collusion – next to and in connection with other causes. Above all, the savings market is an oligopoly with a low willingness-to-switch among consumers. This body of insights gives a first glance into possible solutions from which savers can truly benefit.

Paul de Bijl, Chief Economist of the Netherlands Authority for Consumers and Markets (ACM)