The Creation and Destruction of Price Cartels: An Evolutionary Theory

Abstract

This Article sketches the goals of antitrust law, describes the causes and effects of anticompetitive pricing generally and supracompetitive pricing specifically, explains the inability of antitrust law to suppress some instances of supracompetitive pricing, establishes the importance of trust between firms as a necessary condition for supracompetitive pricing, and illustrates how the strategic exchange of information is crucial to the creation and destruction of trust and thus to the evolution and devolution of price cartels. Part II develops a positive theory that explains and predicts the evolution and devolution of price cartels as a function of the ability of rival firms to exchange information and, in turn, to enable the generation and sustenance of trust that cooperation in supracompetitive pricing decisions will be reciprocated. Part III, followed by a Conclusion, uses game theory as a heuristic to develop and test the proffered theory, posit working hypotheses, and discusses the implications for the creation, interpretation, and adjudication of antitrust law in the context of price cartels.

Keywords: antitrust, price cartels, game theory, evolution, economic espionage

JEL Classification: B49, C70, C71, C72, D43, G38, K21, K22, L41, L44