The Effects of Antitrust Laws on Cartel Pricing

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This research project is designed to increase our understanding of when price-fixing cartels form and how cartels price. The primary modeling innovation is to take account of a key goal of any illegal cartel - to avoid the appearance that there is a cartel. Existing models of collusion will be adapted by introducing a detection technology - whereby the level of prices and the change in prices influence the likelihood of creating suspicions - and antitrust penalties in the form of damages and fines. The analysis is then substantively dynamic in that past prices influence detection and also the level of penalties (as damages are calculated using the prices set by the cartel). Deploying dynamic programming and using both analytical and numerical methods, the properties of cartel pricing dynamics will be characterized. Results will be developed showing how cartel formation and the cartel price path depend on the form of antitrust policy, the method of detection, and industry traits such as market structure, cost and demand variability, demand seasonality, and buyer concentration.As recent cases such as lysine, graphite electrodes, fine arts auction houses, and vitamins exemplify, price-fixing remains a serious antitrust problem. The ultimate implications of this project are in providing the necessary knowledge to more effectively deter the formation of cartels and, in the event they do form, to better detect their presence. Thus far, the antitrust authorities have been largely reactive with respect to price-fixing; responding to customer complaints, internal whistleblowers, and the like. By identifying the properties of cartel pricing dynamics - what to look for - this project will help lay the foundation for a more pro-active antitrust policy that seeks to investigate industries which may be colluding. Furthermore, a more developed understanding of how antitrust policy influences the profitability of collusion will provide the basis for new innovative policies that are more effective at deterring the formation of cartels.