Selling to a Cartel of Retailers: A Model of Hub-and-Spoke Collusion

Abstract

This model describes the working of hub-and-spoke collusion that has been discussed recently by competition policy authorities. We develop a model of tacit collusion between a manufacturer and two retailers, competing a la Rotemberg and Saloner (1986). The best collusive equilibrium between retailers is inefficient and it is in the interest of the supplier to help retailers reach a more efficient collusive equilibrium. The hub and spoke conspiracy reduces double marginalization, but raises the ability of retailers to collude. The impact of a hub-and-spoke cartel on consumer's welfare depends on the bargaining power in the relationship. If the supplier has the bargaining power, the agreement, comparable to a vertical restraint, can be welfare improving in reducing double marginalization. When retailers have the bargaining power, the agreement is closer to an horizontal agreement in which retailers use the supplier to improve their collusive scheme, which leads to a loss of welfare. The result has important implications for competition policy and antitrust enforcement which are further developed in our companion paper Sahuguet and Walckiers (2013).

Keywords: collusion, competition policy, horizontal relations, hub-and-spoke, vertical relations

JEL Classification: D43, L41, L42