Medicare Drug Policy:
In early 2005 there was a discussion of a proposed U.S. government policy that supported the use of so-called discount cards which pharmaceutical firms could offer senior citizens for the purchase of medications. These cards would have a subscription fee and would in return offer discounts if prescription drugs were bought through the issuing companies. The federal government argued that any of the large pharmaceutical companies could enter this market for discount cards, and this in turn would promote competition.
To ensure this the government maintained a web site with posted prices and posted discounts for each card. Some consumer advocates suggested that the companies would just hike up prices and offer a discount from those higher prices, resulting in less benefit for consumers. The government argued that this approach would not make too much sense because there was free entry into the program and resultant competition.
Can you argue, using some formal ideas on tacit collusion, that given the way things are set up it is in fact possible-and maybe even easier-for the firms to squeeze more profits out at the expense of consumers?