Econometrics and Applied Micro Seminar

Abstract: Theories of collusion study the implementation of collusive agreements, yet are silent on how such agreements are initiated. We study the initiation of tacit collusion using a unique dataset from an urban gasoline market that contains the universe of station-level prices for 15 years. We uncover a gradual process whereby dominant firms engage in price leadership to create focal points that coordinate market prices, soften competition, and enhance margins. We show how price leaders can use price experiments to tacitly communicate collusive intentions, resolve strategic uncertainty, and create mutual understanding among rivals over a collusive strategy.