Pharmaceutical Companies Used Monitoring to Overcome Price-fixing Cartel’s Prisoner’s Dilemma During 1990s
A paper published by economist Takuo Sugaya and Mitsuru Igami on 18 August 2022 investigated collusion by Roche, Merck, Takeda pharmaceutical companies to fix prices in the market for Vitamin A, C, E and beta carotene during the 1990s. The pharmaceutical companies worked together to fix vitamin prices. This act of companies coordinating to raise prices to increase their profits is considered a type of cartel which is technically illegal in the United States as it is a form of anti-competitive behavior.
To provide a bit of historical context, in the late 1980s executives from pharmaceutical companies Roche and BASF met together to figure how they increase their profits by raising the price of the vitamins and related commodities they produce. Once executives figured out how they would enforce their collusion, by corroborating each companies’ private sales data with public quarterly financial reports, they recruited other firms like Merck, Takeda, and Eisai to expand the cartel’s cover of the vitamins market.
Sugaya and Igami used a repeated game framework to explain how all the companies overcame their cartel’s Prisoner’s Dilemma which is, for a given company in the cartel, choosing to defect from the cartel at the end of a quarter appears to be a dominant strategy regardless of the other companies’ choice to remain or defect from the cartel. The companies that defect would then undercut its former partners by lowering the prices of its own vitamins that it sells. The problem with this strategy is the fact that the cartel could respond to defection by lowering its own prices as a response to hurt the profits of the companies that defected. This response, however, would leave all the companies with payoffs that have lower profits and possibly lead to over-producing too many vitamins powder. To protect against defecting, the cartel monitored each companies’ quarterly sales which served as a mechanism to ensure all cartel members complied with the collusion plan. Under this agreement it was easier for each company in the cartel to trust that its other partners to not undercut them by lowering the price on vitamins they sell by sanctioning behavior that deviated from the cartel’s agreements.
I believe this mechanism of monitoring was successful at maintaining compliance because the price-fixing cartel lasted for several years, suggesting each company choose to continue colluding in fixing prices of vitamins, refusing to defect, and remained in the cartel despite the legal risks. Furthermore, being in a cartel offers a payoff that where every company in the cartel has higher profits than they would otherwise obtain if they simply competed against each other.
The price-fixing for Vitamin C fell apart when other companies from China entered the market during the late 90s. The Chinese government not only permitted large scale private pharmaceutical manufacturing, but also provided them government funding to support their nascent manufacturing businesses. Since manufacturing vitamin C had lower barriers to entry than the other vitamins and many countries permitted Chinese exports of vitamin C, Roche and Merck’s vitamin C cartel collapsed following the entrance of Chinese manufacturers into the market with cheaper vitamin C.
The price-fixing for other vitamins like A and beta carotene fell apart when American and E.U. regulators intervened to break up the collusion after they gathered substantial evidence to prove the pharmaceutical companies were colluding with each other. State interventions successfully broke up the other vitamin cartels which proves the importance the government plays in ensuring that companies in a market do not abuse their market position to do anti-competitive things, like price fixing, which hurts other companies, consumers and the public at large.
The news report of scientific paper can be found at this link (https://www.gsb.stanford.edu/insights/collusion-course-why-price-fixing-schemes-survive-or-collapse) which also contains a link to the full scientific paper by economists Takuo Sugaya and Mitsuru Igami.