Economic Theory Seminar Series - David Byrne (University of Melbourne)

Title: Negotiating Price Coordination: A Study in Retail Gasoline

Abstract: This paper studies the role that market prices can play in the coordination and renegotiation of market outcomes. We examine a gradual, sometimes disruptive, equilibrium transition with these features using a unique dataset of daily station-level prices from an urban gasoline market. Aided by an information-sharing platform, the firms transition over seven years from one pricing structure with focal pricing rules to another through price signalling. Along the path, we find recurrent cheating on focal pricing rules without punishment and uncover a price war involving renegotiation and resolution. These results establish that prices can yield a sufficiently rich communication medium for implementing and renegotiating collusive pricing structures. We discuss implications for theories of collusion in economics and policies for detecting and prosecuting cartels.