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May 20, 2025

Market entry as antidote to collusion

How do cartels respond to new competition?

Tyler Smith

Source: RGtimeline

Even in highly developed countries price-fixing remains a perennial . The financial returns to successful cartels are substantial, and regulators have few tools for disciplining anticompetitive behavior.

In a paper in the 蝌蚪网 Review, authors and examined the largest price-fixing case in US history, when generic drug manufacturers colluded to increase prices by 50 percent on average. They show that new entrants to pharmaceutical markets helped to discipline this well-organized cartel.

In 2013, Teva Pharmaceuticals—the world's largest generic drug manufacturer—hired a marketing executive with strong industry relationships to implement a program of price increases. The executive formed a cartel that almost immediately coordinated a surge in prices, leading to billions of dollars in higher prescription drug expenditures.

Analyzing data from FDA filings, Medicaid State Drug Utilization Data, and IQVIA's National Prescription Audit, the researchers compared the price trajectories of pharmaceutical markets with different levels of entry and exposure to the cartel.

Figure 3 from the authors’ paper shows how prices in generic drug markets evolved before and after the cartel formation depending on market size and the composition of new entrants.

from Starc and Wollmann (2025)

Panel A compares price trends in large and small cartelized markets. (The red vertical line indicates the first quarter of 2013, when Teva organized the cartel through the marketing executive.) While both market types experienced sharp price increases immediately after cartel formation, their paths diverged subsequently. Large markets, which attract more entrants, saw steadily declining prices over time, whereas small markets maintained persistently high prices throughout the study period.

Panel B shows that when firms not participating in the cartel dominated the entry of new drugs, markets experienced steep price declines. In contrast, in markets where new drug entrants were mostly from cartels, prices remained high.

The evidence suggests that new competition can significantly help safeguard against sustained collusion, with significant benefits to consumers. Overall, the authors estimate that reducing regulatory delays for new pharmaceuticals by just a few years could benefit consumers by as much as a billion dollars.