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Some time ago, I came across a term describing a specific phenomenon observed in free markets. I'm now looking for this term.

When comparing prices of certain staples in some countries, one quickly notices that their prices are exactly the same in different supermarkets and discounters. For example, in Germany, the cheapest price for 1 kg of sugar in any supermarket or discounter is 65 ¢. I have never seen a different price for this for years. The exact brand of sugar is different for different supermarkets or discounters, but the cheapest offer is always 1 kg for 65 ¢. It's the same for eggs, milk, flour, yeast, salt, curd, and many other staples.

This price does not change as its in every competitor's interest to keep it exactly where it is:

  • If a market participant increases the price to make more money off the specific product, many people will avoid the supermarket or discounter because their prices are perceived to be higher in general as the staple in question serves as a price comparison between shops for many people.
  • If a market participant decreases the price to attract more customers, any competitor will decrease the price of their equivalent product to not appear to have higher prices than the participant that decreased their price.

This phenomenon results in supermarkets and discounters limiting the amount of a product customers can buy rather than increasing prices when running short of resupply or taking losses.

Note that I'm not looking for the term "price collusion". The term describes the exact phenomenon described above and does not suggest that price collusion is happening.

I'm not 100% sure this term exists in English. I only know that it exists in German because I read about this phenomenon on the German version of Wikipedia, but no one I asked in real life can tell me what it is. I guess that it exists in English, too, as it is an economic phenomenon not limited to any specific geographic region. Now I need the English term (if it exists) for usage in an English document.

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  • $\begingroup$ It sounds pretty much like "price collusion" to me of a particular kind: we agree to fix the lowest price, so that we won't let price competition become really destructive for us, supermarkets and discounters. You could inquire with the German anti-trust Authority. $\endgroup$
    – Alecos Papadopoulos
    Mar 13, 2018 at 8:59
  • $\begingroup$ Is there a price floor? Some jurisdictions have minimum legal prices basic commodities (milk and cigarettes are common examples) and it is common to see prices set exactly at the floor. $\endgroup$
    – BKay
    Apr 11, 2018 at 21:44
  • $\begingroup$ @BKay Turns out it's difficult to prove that something doesn't exist. I googled for articles with price floors in Germany (in German to increase my chances, oc) but all I was able to find is that farmers want price floors for how much dairies have to pay them for their milk, that there used to be a price floor for sugar beets (found nothing regarding refined sugar), and that our green party wants a price floor for meat. There are so many articles to which those equal prices apply that I'd expect to find websites mentioning price floors if they existed. $\endgroup$
    – UTF-8
    Apr 12, 2018 at 21:38
  • $\begingroup$ @BKay Milk is a particularly interesting one because it actually changes prices every few months. It always does so simultaneously in all supermarkets and discounters. So if there was a price floor affecting the price, it too had to change every few months. That price floor would probably not move at all or only in one direction, but milk changes price in both directions. $\endgroup$
    – UTF-8
    Apr 12, 2018 at 21:41

1 Answer 1

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I know you are at pains to say you are not looking for 'collusion' as an answer, but what you describe sounds very much like tacit collusion. Here's a quote from Competition Policy by Massimo Motta (pp138–140):

I briefly characterise the concept of collusion from the point of view of industrial economics. Note that here I will not use the term "collusion" as a synonym for "collusive agreement that should be outlawed". Indeed, one of the main themes of this chapter is that whereas in economic theory collusion is defined as a market outcome (i.e., "high prices", in a sense to be specified further below), anti-trust authorities and judges should consider as illegal only practices where firms explicitly coordinate their actions to achieve a collusive outcome.

[...] In economics, collusion is a situation where firms' prices are higher than some competitive benchmark. [...] In any case, in economics collusion coincides with an outcome (high-enough price), and not with the specific form through which that outcome is attained.

[...] It is important to stress that [colluding firms need] not talk to each other, neither directly nor through intermediaries: collusive prices will arise through purely non-co-operative behaviour of the sellers. In other words, if detection of deviations is rapid, and if (market) punishments of deviations are likely and credible, then tacit collusion can arise: firms do not necessarily have to talk to each other, let alone agree on complicated schemes, for a collusive outcome to be sustainable. All that is needed is the awareness that a deviation will be identified, and that a "punishment" will follow.

The 'punishment' that Motta refers to is exactly the idea that, if one firm cuts its price to break the tacitly collusive status quo, other firms will 'punish' it by responding with a price cut of their own.

Sometimes, tacit collusion is known by the alternative name conscious parallelism to reflect the idea that firms are consciously mimicking each others' strategies. Particularly among legal scholars, the term conscious parallelism is used to mean coordination of prices without an agreement, whereas the term collusion is reserved specifically for the case in which an agreement has taken place. Among economists, as Motta explains above, both practices are known as (respectively, tacit and explicit) collusion and the conscious parallelism terminology is less common.

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  • $\begingroup$ "In economics, collusion is a situation where firms' prices are higher than some competitive benchmark." All of these products are incredibly cheap. For example, the cheapest 500 g pack of flour always costs 35 ¢, with the second-cheapest often costing more than 2 €. They do this to attract people who compare prices of staples, not to get their prices above some competitive benchmark. Minimum wage in Germany is 8.84 €/h, meaning that 1 hour of works equates to 12.6 kg of super cheap flour. And those 35 ¢ are with sales tax. It's ridiculous. $\endgroup$
    – UTF-8
    Mar 12, 2018 at 19:51
  • $\begingroup$ @UTF-8 When Motta says higher than some competitive benchmark, he doesn't mean that prices are high, he means that they are higher than they would be if firms were competing in prices in the way we would normally expect. The second bullet point in your question explicitly asserts that sellers do not compete in price (i.e., that prices are above the relevant competitive benchmark). $\endgroup$
    – Ubiquitous
    Mar 12, 2018 at 20:04

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