What encourages price-fixing between companies? An economic experiment.

Do we as consumers pay too much for coffee, petrol, magazines, beer or sugar? How do “too high” prices come about?

The goal of companies is to make as high a profit as possible. They might invest in their product quality or launch a new product to attract as many consumers as possible. This often involves high costs and uncertainty. Alternatively, they can escape competitive pressure by agreeing on an inflated price with their competitors. However, by doing so, they not only cause considerable economic damage but may also violate applicable competition law. In Germany, the Federal Cartel Office is responsible for detecting and investigating cartels. Last year alone, it imposed fines of 850 million euros for violations.

Restriction of competition can take many different forms; this research project will focus on coordination at a high price.

Several factors can be relevant:

  • How many competitors are there?
  • How big is the hurdle to enter the market as a new company?
  • How well can competitors observe each other’s pricing decisions?
  • Do competitors compete with each other repeatedly, do they know each other personally?
  • Do they have the opportunity to exchange ideas in person (for example, at industry meetings)?
  • How are cartels uncovered and punished?
  • Is there, as in Germany, a leniency program?

In this research project, you can address this or a similar question. After working out the research question, I would be happy to advise you on the design, implementation and evaluation of an economic experiment.

Fonseca, Miguel A., and Hans-Theo Normann. “Explicit vs. tacit collusion—The impact of communication in oligopoly experiments.” European Economic Review 56.8 (2012): 1759-1772. https://www.dice.hhu.de/fileadmin/redaktion/Fakultaeten/Wirtschaftswissenschaftliche_Fakultaet/DICE/Discussion_Paper/065_Fonseca_Normann.pdf Fonseca, Miguel A., and Hans-Theo Normann. “Endogenous cartel formation: Experimental evidence.” Economics Letters 125.2 (2014): 223-225. https://www.vfs.hhu.de/fileadmin/redaktion/Fakultaeten/Wirtschaftswissenschaftliche_Fakultaet/DICE/Discussion_Paper/159_Fonseca_Normann.pdf Hinloopen, Jeroen, and Adriaan R. Soetevent. “Laboratory evidence on the effectiveness of corporate leniency programs.” The RAND Journal of Economics 39.2 (2008): 607-616. https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.0741-6261.2008.00030.x?casa_token=wA2p1Ybm-S0AAAAA:Eigo-5KFT6G2o9xNdDd4UEb0NctWJV_7TDFuhiIzm60h_dLT1jKgAO2xyrVndYRjOm-0fy7lrgQn11ZAJQ Insbesondere Abschnitte 3, 4 und 8: Holt, Charles A. “Industrial organization: A survey of laboratory research.” The handbook of experimental economics 349 (1995): 402-03. http://www.people.virginia.edu/~cah2k/iosurvtr.pdf

Scientific Partner:

Mentor of the school teams and author of this topic:

Claudia Möllers

Photo: Ivo Mayr

Dr Claudia Möllers works at DICE, the Düsseldorf Institute for Competition Economics, in the area of “Experimental Economic Research”. In her research, she is mainly concerned with concentrated markets, i.e. markets with few competing companies. For example, she has looked at the role of communication between market participants and its effect on the market price in an economic experiment.