Facilitating Collusion with Spot-Price Contracting

Abstract

We investigate the competitive effects of spot-price contracting, in which a buyer and seller contract to transact at a future date at the price prevailing in that market at that future date (the ``spot price''); such contracts are ubiquitous in the beef-processing industry, among others. We show that spot-price contracting can facilitate collusion: When such contracts are available, firms can maintain monopsonistic prices at much lower market concentrations than in standard models of Bertrand competition, and some degree of non-competitive pricing can be maintained for any market concentration. We also show that the effect of differentiation on collusion in this setting is ambiguous: Monopsonistic pricing is most easily maintained at either high or low levels of differentiation, while more competitive pricing arises at intermediate levels of differentiation.

Keywords: Repeated games, Collusion, Antitrust, Agricultural economics

JEL Classification: D43, L13, L4, Q1