Post-Cartel Tacit Collusion: Determinants, Consequences, and Prevention

By Subhasish M. Chowdhury (University of Bath)

We experimentally investigate the determinants of post-cartel tacit collusion (PCTC), the effects of PCTC on market outcomes, and potential policy measures aimed at its prevention. PCTC occurs robustly with or without fines or leniency and is determined both by collusive price hysteresis and learning about cartel partners’ characteristics and strategies. As a result, it is also strongly related to the preceding cartel success. PCTC generates a downward bias in the estimated cartel overcharges. This threatens the effectiveness of deterrence induced by private damage litigation and fines imposed on colluding firms based on the overcharge. This bias further increases with preceding cartel stability such that especially more stable sets of colluding firms may be deterred less when PCTC is present. Re-matching colluding subjects with strangers within a session prevents PCTC. This indicates that barring colluding managers from their posts could help impede PCTC in the field.

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