Price-Fixing: A Game of Trust
What is Price-Fixing?
Price-fixing is a market manipulation performed by firms that control a large amount of the same resource. Through illicit internal collusion, these firms can agree to raise prices on all sorts of goods ranging from ready-mix concrete to canned tuna.
The Game:
Game theory takes a front-seat in price-fixing schemes according to new research by Takuo Sugaya, an economist at the Stanford Graduate School of Business and Mitsuru Igami from the Yale Department of Economics. Sugaya and Igami found that price fixing can only exist under specific conditions that encourage competing businesses to work together. This requires long-term trust between the colluding companies, as one could betray the other by dropping their prices to market equilibrium. That means the most likely firms to engage in price-fixing are small cartels controlling the supply of a particular good.
Strategies Against Price-Fixing
Understanding the recipe for price-fixing reveals effective strategies against it. The Vitamin C cartel evaporated in the 90’s when Chinese firms outproduced them and sold below the previously fixed price. It was difficult to incorporate new entrants into an intricate scheme, revealing a critical weakness of cartels: they invite the existential threat of cheap competition as they grow. The more firms involved in a scheme, the more difficult it becomes to prevent one from betraying the cartel. Exploiting this vulnerability, policy makers may be able to identify the likelihood of price-fixing within a given industry based on the number of competing companies within it.
A Different Strategy:
Apart from policy decisions, a decentralized approach could take down price-fixing cartels. If buyers can identify a price-fixing situation, they could all agree to purchase from only a single brand. This would damage the cartel’s ability to regulate output, simulating a violation of the cartel’s internal trust network. With heightened collusion risks, the firms would be more likely to identify competition and a return to market equilibrium as the winning strategy. While decentralized strategies against price-fixing may have been difficult to carry out in the past, I’m curious to see if technological developments make it more feasible for the future.