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Structural theories of collusion posit that demand and supply characteristics of an industry's structure can be used to determine the likelihood of anticompetitive cooperation by competitors. A variety of structural approaches have been advocated by academics and applied by both enforcement agencies and courts.
Any structural theory, however, must at bottom rest on an understanding of the necessary conditions for collusion. To collude effectively, firms must be able (1) to reach an agreement, (2) to detect breaches of the agreement, and (3) to punish firms that breach. Advocates of the structural approach have suggested a variety of market characteristics that affect these conditions. Some characteristics (such as seller concentration, or the homogeneity of the product) relate to the ease of reaching an agreement; others (such as stable demand, or announcement of the lowest sealed bid) affect the ability to detect price-cutting breaches. However, none of the structural variables currently considered by academics or enforcement agencies relate to the third condition for successful collusion—the necessity of being able to punish breach; thus the current list of structural variables is systematically incomplete. This omission of variables affecting the ability to punish may explain the empirical failure of the structural approach to identify collusion.
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