Exploring the Boundaries of Unlawful Collusion: Price Coordination when Firms Lack Full Mutual Understanding

Proving that firms have violated Section 1 of the Sherman Act requires showing that they have a "meeting of minds" regarding coordinated behavior; it is not high prices that are illegal but rather the mutual understanding that produces those high prices. This paper offers a framework for exploring the relationship between mutual understanding and collusive outcomes, and uses it to characterize pricing behavior when it is common knowledge among firms that price increases will at least be matched. An upper bound on price is derived which is less than the equilibrium price. Supracompetitive pricing is sure to emerge even though firms lack mutual understanding as to who will be the price leader.