Competitor Coupons: A Remedy for Residual Collusion

Abstract

There are well-documented episodes of prices remaining at supracompetitive levels even after a cartel was shut down by the competition authority. As long as market conditions remain reasonably stable, collusive prices may still be incentive compatible so the collusive equilibrium could continue after firms are no longer engaging in illicit communications. This situation poses a challenging dilemma: consumer harm persists because of past unlawful conduct but there is no apparent recourse. This paper offers a remedy in the form of coupons. As part of the penalty imposed by the competition authority, each cartel member is required to distribute coupons to its past purchasers. Contrary to their usual form, these coupons can only be used to buy from a firm’s competitors. I show how this temporary intervention can help destabilize collusion and restore competition.