How do you identify and prevent collusion and price discrimination in markets with asymmetric information?

1 What is collusion?

Collusion is a form of strategic interaction where two or more firms agree to cooperate or coordinate their actions to gain a competitive advantage over other firms or consumers. Collusion can take various forms, such as fixing prices, dividing markets, limiting output, or sharing information. Collusion reduces market efficiency, lowers consumer surplus, and creates deadweight loss.

2 How to detect collusion?

Detecting collusion can be tricky, as firms may attempt to conceal their agreements or use indirect indicators to communicate. Nevertheless, certain signs of collusion exist, such as similar or identical prices that are not based on costs or demand changes, price changes that follow a common pattern, price wars or price leadership that are not justified by market conditions, market shares that remain stable despite competitive pressures, low entry or exit rates in the market, and high profits or margins that cannot be explained by innovation or differentiation.

3 How to prevent collusion?

To prevent collusion, it is necessary to implement a combination of legal, regulatory, and market-based measures. This includes enforcing antitrust laws and imposing penalties for collusive behavior, encouraging competition and entry in the market by reducing barriers and promoting innovation, promoting transparency and disclosure of information by firms and consumers, empowering consumers and buyers to negotiate and compare prices and quality, as well as fostering a culture of compliance and ethics among firms and managers.

4 What is price discrimination?

Price discrimination is a form of pricing strategy where a firm charges different prices to different groups of consumers for the same or similar product or service, based on their willingness or ability to pay. Price discrimination can increase the firm's profits, but also affect consumer welfare and market efficiency.

5 How to identify price discrimination?

Identifying price discrimination can be difficult, as firms often use subtle or complex methods to segment and target consumers. However, some signs of price discrimination to look out for include variations in prices for the same product or service across locations, time periods, channels, or platforms. Additionally, prices for different versions or bundles of the same product or service that do not reflect cost differences may be indicative of price discrimination. Furthermore, different prices for the same product or service based on personal characteristics such as age, gender, income, or loyalty may be a sign of price discrimination. Lastly, variations in prices based on consumer behavior such as purchase history, browsing patterns, or preferences could also indicate price discrimination.