What Martha's Vineyard's gas stations can teach us about drug pricing:
Off the coast of Massachusetts sits the picturesque vacation locale of Martha’s Vineyard. While life there on the island is generally lovely, a few years ago the island’s residents realized their gas prices were meaningfully higher than those on the mainland . Furthermore, despite decreases in oil prices the gas never seemed to get any cheaper.
Given these facts, I’m sure the plaintiffs were quite surprised when the court rejected their case and then an appeals court upheld this decision. How could this happen? Clearly these gas stations were exploiting their market power to charge higher prices, doesn’t thatThe thing is, firms independently charging higher prices isn’t a crime. Price fixing requires some actual communication and agreement between the firms about their scheme – and the court said there was no evidence of this type of.
Well, first we need a small number of firms. As the number of firms increases, the benefits of cheating by incrementally lowering prices exceed the benefits of cooperating by keeping prices at the same level as your competitors. Second, you need there to be little threat of entry into the market by someone from outside of the market. Without barriers to entry, another firm attracted by the high profits would enter and compete for market share for cutting prices.
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