The Creation and Destruction of Price Cartels: An Evolutionary Theory

Why are gas stations able to charge price premiums above competitive price and how are companies arrive at identical supracompetitive price? The article describes the causes and effects of supracompetitive pricing, explains the inability of antitrust law to suppress some instances of supracompetitive pricing, establishes the importance of trust between firms as a necessary condition for supracompetitive pricing, and illustrates how the strategic exchange of information is crucial to the creation and destruction of trust and thus to the evolution and devolution of price cartels. The author develops a "positive theory" that explains and predicts the evolution and devolution of price cartels as a function of rival firms's ability to exchange information and establish supracompetitive pricing. The author uses game theory to test the positive theory and discusses implication for the creation of antitrust law in the context of price cartels.