The Effect of Explicit Communication on Pricing: Evidence from the Collapse of a Gasoline Cartel

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We study the collapse of collusion following the execution of search warrants by the Canadian Competition Bureau against cartels in Québec’s retail gasoline market in May 2006 and show that collusion involved two empirical regularities: high margins, and asymmetric price adjustments. Using weekly, station-level price data from before and after the warrants we test whether collusion was successful by evaluating the decline in margins following the collapse, and whether asymmetric price adjustments were in fact part of the cartel’s pricing strategy. We do so in the markets targeted by the Bureau investigation, and also in markets throughout the province with similar pricing patterns prior to the warrants (cyclical markets). Our results suggest that stations in both the target markets and the cyclical markets adjusted their pricing following the announcement: margins fell (by 30% in the cartel cities, and 15% in cyclical markets), and price adjustments became more symmetric.