Efficient Cartelization Through Buyer Groups

34 Pages Posted: 4 Feb 2009 Last revised: 17 Feb 2012

Chris Doyle

London School of Economics & Political Science (LSE) - Department of Economics

Martijn A. Han

Humboldt University of Berlin

Date Written: October 16, 2010

Abstract

In industries with unobservable wholesale contracting, retailers may enjoy cartel rents in their output market through the formation of a buyer group in their input market. A buyer group allows retailers to credibly commit to increased input prices, which serve to reduce combined final output to the monopoly level; increased input costs are then refunded from suppliers to retailers through slotting allowances or rebates. The stability of such an 'implied cartel' depends on the retailers' incentives to secretly source from a supplier outside of the buyer group arrangement at lower input prices. Cheating is limited if retailers sign exclusive dealing or minimum purchase provisions. If the buyer group brings about cost efficiencies, the mechanism may be stable for every discount factor, while consumer welfare may actually be raised above competitive levels.

Keywords: buyer groups, collusion, exclusive dealing, minimum purchase clauses, rebates

JEL Classification: K21, L13, L41, L42

Suggested Citation

Doyle, Chris and Han, Martijn A., Efficient Cartelization Through Buyer Groups (October 16, 2010). Amsterdam Center for Law & Economics Working Paper No. 2009-03. Available at SSRN: https://ssrn.com/abstract=1336514 or http://dx.doi.org/10.2139/ssrn.1336514

Chris Doyle

London School of Economics & Political Science (LSE) - Department of Economics ( email )

United Kingdom

Martijn A. Han (Contact Author)

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

HOME PAGE: http://www.martijnhan.com

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