Tacit Collusion in Markets Under Regulatory Threat: The Effect of Multimarket Contact on Pricing Strategies

Abstract

Firms under regulatory threat often have a collective interest in influencing policy outcomes through market behaviour. However, when coordination is prohibited and collective benefits are non‐excludable, such efforts are constrained by coordination and outcome uncertainty. While prior research emphasizes firm influence through the public policy arena, much less is known about how firms navigate collective action problems in the market arena, where interdependent incentives and uncertainty about rivals' behaviour make coordination difficult under legal constraints. We address this gap by theorizing that multimarket contact (MMC) creates the conditions under which coordination and sanctioning mechanisms become feasible. Using data from the Indian pharmaceutical industry's response to a 2013 price‐control regulation, we show that firms with higher MMC are more likely to raise prices in regulated markets, thereby participating in collective efforts to shape the average market price used to set price ceilings. Our findings extend the MMC framework by showing how firms can activate it selectively for cooperative purposes under regulatory pressure, even when assumptions like competitive parity are violated. More broadly, we identify MMC as a contingency that enables firms to overcome collective action barriers in the market arena, offering new insights into the interplay between market and non‐market strategy.