Optimal Cartel Pricing in the Presence of an Antitrust Authority

Abstract

Price dynamics are characterized when a price-fixing cartel is concerned about creating suspicions of the presence of a cartel. A dynamical extension of static models yields the counterfactual prediction that the cartel initially raises price and then gradually lowers it. An alternative specification generates a more plausible result that the cartel gradually raises price. For that specification, the long-run cartel price is found to be decreasing in the damage multiple but is independent of the level of fixed fines. A more stringent standard for calculating damages is shown to induce the cartel to price higher.

JEL Classification: L1, L4