Building Trust: A Dynamic Game of Collusive Price-fixing in the Chilean Pharmaceutical Retail Industry

Abstract

We propose a dynamic pricing game of incomplete information where firms' beliefs about competitors' prices can be biased. These biases create a coordination problem to achieve a collusive outcome. We apply the model to study the initiation stage of a price-fixing cartel in the Chilean pharmaceutical retailing industry, where firms initially colluded to raise prices on a small set of markets and later expanded this collusion to a larger set of markets. We show that the coordination problems explain the slow transition of firms' pricing from a non-collusive to a collusive equilibrium: without accounting for the coordination problem, the firms raise prices on all markets instantly. We evaluate the effects of counterfactual antitrust policies, such as price caps and divestiture, on the initiation stage. Our results show the importance of accounting for coordination problems among members when setting policies to prevent cartels.

Keywords: Collusion; pharmaceutical retail; dynamic game; biased belief

JEL Classification: L13, L40, C73, K21, C25, C57, D22