Market Transparency, Relational Contracts, and Collusion in the Colombian Electricity Market
by Miguel Espinosa, Rocco Macchiavello, Mario Bernasconi, and Carlos Suarez
In models of collusive behaviour firms deviate from current profit maximization in anticipation of future rewards. As current profit maximization places little restrictions on firms' pricing behaviour, these models are hard to test and collusive conduct hard to infer from pricing behaviour alone. This paper tests for, and quantifies the value of, a collusive arrangement in the Colombia energy sector. We take advantage of the announcement of a market transparency reform that potentially made it harder for firms to sustain a collusive arrangement. We show that bids submitted by a subset of firms in the market collapsed immediately after the announcement, and before the implementation of the reform. We construct several proxies for (potential) cartel membership based on firms' characteristics a priori correlated with incentives and ability to collude. Within an event-study framework, the resulting proxies capture well the observed drop in bids following the announcement. We rule out confounders and provide forensic evidence of how the cartel functioned and how firms might have communicated about it. A calibration of the dynamic incentives compatibility constraints confirms that a collusive arrangement was sustainable before, but not after, the reform. Profits of firms in the cartel and the equilibrium price fell substantially after the reform. A back-of-the-envelope calculation suggests that the average consumer paid 3% higher energy bills as a result of the cartel.