The Value of Relational Collusive Arrangements in the Colombian Electricity Market

Abstract: Informal inter-firm relationships are beneficial for participating firms but can be detrimental to market efficiency, e.g., in the case of informal collusion. By their nature, it is empirically challenging to identify collusive agreements sustained by informal relationships. This paper exploits a regulatory reform in the Colombia energy market to detect the presence of a collusive agreement among (some of) the electricity generating firms. To isolate informal collusion from confounders we exploit the lag between the announcement and the implementation of a transparency reform that would make it harder for firms to collude. Under informal collusion, the announcement of the reform destroys the future value of the informal agreement and thus leads to its instantaneous collapse – before the reform is implemented. Additional analysis identify the firms in the cartel and show that the announcement of the reform decreased by 43% the bid submitted by cartel members. A simple calibration of the incentive compatibility constraints suggests that the value of the collusive agreement was substantial for most of the participating firms.