How is collusion initiated and implemented? —Evidence from hundreds of markets

Most markets involve repeated interaction, making them vulnerable to coordination between firms (collusion), either explicitly (with communication) or tacitly (with no verbal communication).

The purpose of this three-year project is to investigate how firms initiate and implement collusion, defined as secret or unspoken agreements to increase profits. Existing knowledge is limited to case studies—primarily of convicted cartels—and classroom experiments.

We will contribute by studying 960 well-defined markets for off-patent pharmaceuticals, of which we observe the initiation phases of likely collusion in 545 markets.First, we will study how collusion is initiated by analyzing the pricing strategies used by firms to signal intent to collude. Second, we will identify characteristics of firms initiating and participating in collusion.

Third, we will analyze the implementation and effectiveness of collusion.The research will inform about how the risks of collusion can be reduced, how close collusive prices get to monopoly prices, and aid development of methods to uncover both established and emerging collusion. In addition, it can shed light on how prices are used to communicate.

Thus, in a context in which price information is increasingly available online, the research contributes to our understanding of how price information sharing opportunities affect the risk of tacit collusion.