When a given set of companies compete in multiple markets, these firms engage in multimarket contacts. Such interdependencies across markets create a mutual forbearance incentive,1 and have been shown to decrease within-market competition.2,3 In my research, I evaluate whether the effects of MMC span beyond within-market actions (e.g., prices, quality) and also influence market participation decisions, in the Portuguese off-patent drug market.
With a simple theoretical model, I show that the potential of MMC to enhance collusion may depend on the ability of these contacts to restore an overall symmetry between companies which may fail to be observed in individual markets. Based on this result, I put forward a measure which weights contacts between companies by their importance in smoothing market share asymmetries and test whether pharmaceutical firms with greater MMC have greater survival chances in individual markets.
Results show that, when the unit of analysis is a firm in a given market, MMC do not influence pharmaceutical firms’ survival chances in individual markets. However, when the unit of analysis is a market, higher average MMC between companies active in a market are associated with a lower probability of observing firms’ exit from that market.
These distinct results suggest that the degree of mutual forbearance is essentially a feature of the individual market under consideration, and not a characteristic of inter-firm rivalry independent of the level of competition faced by other competitors in the market.
Carolina Santos
Postdoctoral Researcher
[1] Bernheim, B. D., Whinston, M. D. (1990). Multimarket contact and collusive behavior. The RAND Journal of Economics, 1-26.
[2] Ciliberto, F., Watkins, E., Williams, J. W. (2019). Collusive pricing patterns in the US airline industry. International Journal of Industrial Organization, 62, 136-157.
[3] Lin, H., & McCarthy, I. M. (2023). Multimarket Contact in Health Insurance: Evidence from Medicare Advantage. The Journal of Industrial Economics.