MARTHA’S VINEYARD, an island off the coast of Massachusetts, is a favourite summer retreat for well-to-do Americans. A few years ago, visitors noticed that petrol prices were considerably higher than in nearby Cape Cod. Even those with deep pockets hate to be ripped off. A price-fixing suit was brought against four of the island’s petrol stations. The judges found no evidence of a conspiracy to raise prices, but they did note that the market was conducive to “tacit collusion” between retailers. In such circumstances, rival firms tend to come to an implicit understanding that boosts profits at the expense of consumers.
No one went to jail. Whereas explicit collusion over prices is illegal, tacit collusion is not—though trustbusters attempt to forestall it by, for instance, blocking mergers that leave markets at the mercy of a handful of suppliers. But what if the conditions that foster such tacit collusion were to become widespread? A recent book* by Ariel Ezrachi and Maurice Stucke, two experts on competition policy, argues this is all too likely. As more and more purchases are made online, sellers rely increasingly on sophisticated algorithms to set prices. And…Continue reading