Trust Building Dynamics in Cartel Formation: A Structural Analysis

Abstract

This paper introduces a dynamic game that explores the challenges faced by
firms when initiating collusion. Utilizing a case study of price-fixing cartel in the Chilean pharmaceutical retail sector, the model addresses the in-centive and coordination problems that emerge. Initially, firms colluded in
selected markets before expanding their collusion to additional ones. The argument posits that firms increase trust by learning from early collusive outcomes, thereby facilitating subsequent collision. The paper evaluates various
counterfactual antitrust policies and assesses their efficacy in preventing cartels. This paper emphasizes the importance of addressing coordination issues
and proposes that failing to account for these issues can lead to misleading
policy predictions.

Keywords: Collusion, Dynamic Game, Oligopolistic Price Competition, Firms’ Beliefs, Repeated Games

JEL Classification: C72, C73, D43, L13, L41