Tacit collusion of conglomerate firms through price signaling under multimarket contact

Abstract

We suggest a price signaling strategy that offers a microfoundation for the process leading to tacit collusion under multimarket contact, even in cases where previous theoretical explanations fail. It rests on the assumptions that firms can communicate collusive intentions solely through their price setting behavior and that such price signaling can be conducted more efficiently under multimarket contact. We are able to verify these assumptions by means of an economic laboratory experiment. Our results bear important insights for competition policy by highlighting that limiting firms' possibilities to engage in price signaling can effectively mitigate the emergence of tacit collusion.

Keywords: multimarket contact, tacit collusion, price signaling, markov process, uniform pricing constraint

JEL Classification: C92, L13, L41