Wednesday, November 1, 2017 at 11:40am to 1:10pm
Uris Hall, 498
Jorge Ale Chilet
University of Pennsylvania
How does collusion start? This paper studies the emergence of collusion in the presence of multimarket contacts. It analyzes price fixing among the three main retail pharmacy chains in Chile, and how the firms were able to coordinate on a better equilibrium colluding gradually over products. The scope of collusion grew gradually as firms colluded on an increasingly larger number of drugs over a period of four months, raising the price of each product among themselves by means of staggered, sharp price increases. I claim that this behavior was due to the firms' mistrust of their competitors, which was stronger at the beginning of the coordination period. Gradualism allowed firms to learn their competitors' willingness to collude and build trust over time. I estimate the demand for the pharmacies in each market using the collusive price increases as supply-side shocks. I find that the pharmacies raised first the prices of products in which they were more differentiated. This result is consistent with trust building as collusion on differentiated products is safer due to smaller losses should the collusive scheme collapse. Detailed internal records of the pharmacies' monitoring activity of their competitors provide further evidence of trust building. Although monitoring peaked in the week of the coordinated price increases of each brand, the size of these spikes in monitoring declined over time, as would be expected from increased trust in the colluding firms.