Gradually Rebuilding a Relationship: The Emergence of Collusion in Retail Pharmacies in Chile

How does collusion start? This paper studies the emergence of collusion in the presence of multimarket contacts. It analyzes price fixing among the three main retail pharmacy chains in Chile, and how the firms were able to switch to a better equilibrium colluding gradually over products. The scope of collusion grew gradually as firms colluded on an increasingly larger number of drugs over a period of four months, raising the price of each product among themselves by means of staggered, sharp price increases. I use the large collusive price increases as supply-side shocks to estimate the demand for the pharmacies in each market. My main result is that the pharmacies raised first the prices of products in which they were more differentiated. I claim that this behavior was due to the firms’ mistrust of their competitors, which was stronger at the beginning of the coordination period. Hence, collusion started on differentiated products because it was safer due to smaller losses should the collusive scheme collapse. Gradualism allowed firms to learn their competitors’ willingness to collude and build trust over time. Furthermore, data on the pharmacies’ monitoring activity of their competitors show that monitoring during the coordinated price increases declined over time, which is consistent with trust building.