Should Pricing Policies be Regulated when Firms may Tacitly Collude?

Active antitrust policy may result in perverse effects detrimental to consumer and social welfare because such active policy affects market structure through its impact on the mediumand long-run decisions of firms. This paper investigates the effects of deregulation of firms' pricing policies in a dynamic setting that allows for tacit collusion. We show that, provided the consumer reservation price imposes no effective constraints on firms, price deregulation will lead to discriminatory prices that are almost always and almost everywhere lower than mill prices. By contrast, if the consumer reservation price is binding, the welfare properties of the two pricing policies will be reversed with consumers losing and firms gaining from discriminatory pricing. The required degree of price flexibility for this to happen is lower in more concentrated market structures. This implies that if market concentration is already high, deregulation of pricing policies is less likely to benefit consumers unless the regulatory authorities are willing to impose accompanying restrictions intended to reduce price flexibility.