Information sharing and price coordination

Research from the University of Liverpool explores the role information sharing plays in facilitating price coordination between firms, leading to higher prices for consumers.

The investigation aims to help competition authorities better understand coordination methods, to guide policy design and potentially lead to more competitive markets delivering lower prices, ultimately benefitting consumers.

Background

Well-functioning markets that deliver goods and services at reasonable prices to consumers are important to help households make ends meet, and ensure resources are allocated efficiently in the economy.

As commerce progressively moves online, high-frequency price information is increasingly available to consumers and firms.

When prices are transparently available to all market participants, this has the potential for pro-competitive effects, as timely price information enables consumers to respond to price signals, spurring price competition.

However, a growing international roster of anti-trust cases hinge on the potential anti-competitive effects of price information sharing between firms.

With the spread of digital technology, access to price data is facilitated by platforms which take several forms, including:

• Private sector intermediaries that provide price-sharing platforms for the benefit of competing firms
• Private sector firms that provide price comparison tools available to firms or consumers
• Government-run price-sharing platforms.

Motivated by the potential pro-competitive effects of price sharing information, policymakers have proposed and introduced transparency programmes in a wide range of markets.

However, prior to this research, it was presumed that it was unfeasible for firms to coordinate on above-competitive prices without direct communication.

Our research

Research by Professor Nicolas de Roos, and an international team of collaborators, has investigated the role price information sharing plays in the coordination of prices between ostensibly competing firms.

Using a combination of forensic examination of comprehensive high-frequency pricing data, and econometric methods guided by economic theory, the investigation uncovered the mechanisms employed by firms to coordinate prices using detailed price data from information sharing platforms.

It also explored the role of detailed price information, the impact of proposed remedies to address anti-competitive conduct and the morphability of such mechanisms in the face of market changes – which is particularly important given the increasing prevalence of digital price information sharing technologies across a diverse range of markets.

The research has delivered several novel insights:

• Aided by price sharing platforms, firms are able to coordinate on higher prices by using prices themselves as a communication device
• There are various mechanisms through which firms develop, test and implement price coordination
• Consumers face costs of collecting price information that limit the potential countervailing competitive benefits of price information sharing.

The impact

This research has the potential to benefit consumers by disrupting anti-competitive coordination – leading to lower prices in markets with opportunities for price information sharing – by improving the existing legislative framework and the operations of competition authorities.

It provides policymakers with key insights into the mechanisms used by competing firms to coordinate on pricing decisions in a wide range of markets, as well as the tools for evaluating policies to interfere with such coordination.

The research has impacted the operation of competition policy and behaviour of competition authorities in several countries.

In Australia, it played a pivotal role in blocking a substantial banking merger by the competition authority (overturned on appeal) due to concerns of mortgage rate coordination. It also played a key role in the revised guidelines for assessing the coordinated effects of mergers in Australia.

In Europe, the research is being utilised by the European Commission’s competition authority to detect anticompetitive conduct.

It has also aided the formulation of policy and practices in response to emerging price algorithms and collusion in the United States, as evidenced by a feature in Chapter 7 of the 2023 Economic Report of the President.

What’s next

Ongoing research is examining – empirically and theoretically – the mechanisms used by firms to sustain anti-competitive pricing using price-based communication enabled by price information sharing platforms.

This will facilitate a better understanding of the impact of platform design on the competitive effects of information sharing, and the effects of competition policy remedies on anti-competitive pricing practices, based on information sharing.