Saturday, January 9, 2010

Elinor Ostrom and Collusion

I was just reading a short summary of Elinor Ostrom's work on management of common resources. According to the description, she examines how communities of autonomous actors manage to avoid the tragedy of the commons without erecting a resource management organization that can establish formal rules of usage and punish violators with the backing of the State.

It occurs to me that her work might have some application to the issue of corporate collusion. A common market, served by a group of oligopolists, can be seen as a common resource. Certainly price collusion to "manage" this resource for the extraction of larger profits would be something that needs to happen without direct State support, to say the least. I wonder if Ostrom's work gives us any additional information about the feasibility of price collusion.

I have to say that I am a little amused by what seems to me to be a contradiction in the responses of some free market leaning economists to Ostrom and her work. In general, such economists are dubious about the ability of corporations to effectively collude on price fixing for any serious length of time. The pressures and temptations of individual self-interest will always lead such conspiracies to collapse. And yet when the same problem is framed, as Ostrom frames it, as the ability of people to manage their affairs without state intervention, then we find that there are indeed mechanisms that will provide for the long term success of group collaboration over the temptation to cheat.

Update: Bruce Yandle, publishing in the libertarian journal The Independent Review, manages to argue that firms which collude to control common resource extraction will simultaneously be effective in their efforts to conserve the controlled resource, and be ineffective in their efforts to charge monopoly prices for the controlled resource. Actually, I use the word "argue" loosely in regards to monopoly prices; Yandle pretty much just states that efforts to raise prices will be ineffective. I believe that for many libertarian economists, the futility of collusive price-fixing is regarded as being too well-known to bear repeated explanation.

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