Medicare Drug Policy:

In early 2005 there was a discussion of a proposed U.S. government policy that sup-

ported the use of so-called discount cards which pharmaceutical firms could offer senior citizens for the purchase

of medications. This 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 pharmaceu

tical 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 the 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 senses 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 firms to squeeze more profits out at the expense of consumers?