A Method for Calculating the Probability of Collusion Based on Observed Price Patterns

Abstract

We present a method for estimating the probability of collusion based on observed price patterns. Given these probabilities, we can also estimate the impact of the number of firms and other relevant variables on the probability of collusion, and price increases and total expected overcharge caused by collusion. These estimates are essential to inform collusion prevention policies. We apply our method to 28,863 auctions in the Swedish generic pharmaceuticals markets, predicting that 64% are part of price patterns that are at least partly due to collusion. We find that moving from competition to collusion increases average prices by 65%. Moreover, our results demonstrate that multimarket contact significantly increases the probability of collusion and that increasing the number of firms from two to four reduces the probability of collusion by approximately one-half. Nonetheless, collusion remains a concern even with four or five firms.

Keywords: bid rigging, price coordination, collusion, competition

JEL Classification: C57, D22, D44, I11, L41