Colluding Through Suppliers

CSEF Working Paper No. 224

36 Pages Posted: 27 Apr 2009

See all articles by Salvatore Piccolo

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF

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Date Written: April 25, 2009

Abstract

In a dynamic game between N retailers and a large number of suppliers, I show that inefficient contracting emerges as a mechanism to implement collusion among retailers, building on the natural 'complementarity' between retail and wholesale prices. When efficient collusion is not sustainable, this complementarity allows retailers to rely on inefficient input supply, entailing double marginalization and negative franchise fees, to squeeze the wedge between collusive and deviation profits. I also study the role of communication on the equilibrium outcomes of games where retailers have the initiative. It turns out that communication is indeed fundamental to strengthen cartels' sustainability, although generating efficiency losses.

Keywords: Bertrand competition, double marginalization, collusion, competing hierarchies.

JEL Classification: D21, D43, L42

Suggested Citation

Piccolo, Salvatore, Colluding Through Suppliers (April 25, 2009). CSEF Working Paper No. 224, Available at SSRN: https://ssrn.com/abstract=1394864 or http://dx.doi.org/10.2139/ssrn.1394864

Salvatore Piccolo (Contact Author)

University of Bergamo, Compass Lexecon and CSEF ( email )

via de caniana 2
24127
Bergamo, BG 24127
Italy

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