How is collusion initiated? Empirical analyses based on price data from hundreds of markets

Most markets involve repeated interaction. Rather than fierce competition, this makes markets vulnerable to coordination between firms aimed to increase profits (collusion), either explicitly (with direct communication) or tacitly (with no or indirect communication). While collusion has been well studied, little is known about how firms initiate it, particularly tacit collusion.

Existing knowledge comes from laboratory experiments that incompletely match market conditions, or case studies, mainly of convicted cartels involving direct communication.

In this project, we will study the Swedish markets for prescription pharmaceuticals whose patents have expired. In most markets, one originator and a couple of generic copies are sold. Previous research has shown that in more than half of the almost one thousand markets there are price patterns which with 99% certainty are the result of collusion.

The purpose of this project is to study how collusion is initiated. For example, how often is collusion initiated by firms using prices to signal intent to coordinate and what characterizes the firms that initiate and participate in collusion?

Beyond providing information on how the risks of collusion can be reduced, the research 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.