Joi Ito's conversation with the living web.


Extracts from my article
on how the top six Paris hotels were caught fixing prices.

Fines ranged from 258,000 euros for the Hotel de Crillon to 55,000 euros for the Hotel Meurice. The Hôtel George V was fined 115,000; the Hôtel Plaza Athénée, E106,000; the Hôtel Ritz, E104,000; and Le Bristol, E81,000.

Email featured prominently in the government's case:

"I have the pleasure here of sending you our results and await yours," a sales coordinator at the George V, identified only as Madame X, said in an e-mail dated Feb. 2, 2001, sent to counterparts at the Hôtel Ritz, the Hôtel Plaza Athénée, the Hôtel Meurice, the Hôtel de Crillon and Le Bristol.

The e-mail included a chart showing levels of occupancy, average room prices and revenue information for the previous December.

They were not very happy to have us reporting on this story.

In the gold-festooned lobby of the Hôtel de Crillon, housed in a building constructed for Louis XV on the Place de la Concorde in the middle of Paris, the communications director declined to make any comment on the fines and insisted that a reporter attempting to speak with guests leave the premises immediately.

Some were not surprised by the price fixing.

A frequent guest at the Hôtel Meurice, an opulent hotel that is owned by the Brunei Investment Agency, said he was not surprised by the collusion. "In this level of hotel you can always negotiate the level of prices anyways," said Luc Janssen, a Belgian who stays at the hotel often.

In what other sectors is price fixing likely or highly suspected?


Japanese beer companies. All of them offer identical products at exactly the same price. When the price changes they move in lock step. They compete on marketing message and taste only.

This is a well developed area of economics, and what you a refering to is called oligopoly pricing. It need not be explicit as the 5 hotels, sometimes (called implicit or tacit collusion) a price leader exists and it is in the best interest of the other players to follow along in the pricing, never needing to discuss things explicitly).

Note that this can be done either thourgh setting a common price or limiting the output (the same result in practice).

The basic things that you need for this to happen are;

i. a small number of players concentrating most of the production capacity

ii. high costs of entry for new players

iii. some way that the players can monitor each other and see what prices/levels of output the others are setting (so that no one cheats, note the obvious incentive to cheat).

iv. it is more likely to occur when players can change prices quickly and thus if any one defects the payoff is relatively smaller (as the time period that monopoly profits can be reaped by them alone is smaller)

v. Inelastic demands (so that monopoly profits are relatively large. this may seem to contradict this occuring in Hotels, but given that often the employer iis paying for them the demand for many guests is likely to be highly inelastic (and the hotels can price discriminate by making you negotiatiate which you are more likely to do if it is comming out of your own pocket, as the gentelman in the article seems to have figured out).

The biggest example of the above is OPEC which is a institutionalized cartel. Recently a large number of pharma companies got caught doing this by the EU trade commision explicitly. The same thing happened also recently with the US music CD market.

Ofcourse in the casis of tacit colusion is a bit harder to explain, but if you know some game theory think of it as a repeated prisoners dilema with the monopoly profits as the cooperation payoff (divided between all the players) and the payoff to defecting being 1 period of monopoly profits for yourself followed by infinity of 0 profit.

As you can imagine wether the above occurs is also affected by the discount rate, so the more impatient the players the less likely they are to form an effective cartel. Thus, incentive structures for decition makers really matter in this kind of situation (you want patient executives if you are a shareholder, while they executives if they are on bonus pay might want to defect and make the monopoly profits for that first period after defection).

I hope that the above is somewhat understandable.

> In what other sectors is price fixing likely or highly suspected?

The variety is quite interesting, as a sampling in a few countries shows:






Some URLs in my comment above died...

> In what other sectors is price fixing likely or highly suspected?

The variety is quite interesting, as a sampling in a few countries shows:







It's a common practice. I used to work in that business. Everyone does fix prices.

Leave a comment

Recent Comments

Whiplash by Joi Ito and Jeff Howe
Freesouls by Joi Ito

Category Archives

Monthly Archives