Illinois Walls: How Barring Indirect Purchaser Suits Facilitates Collusion

25 Pages Posted: 30 May 2005 Last revised: 1 Apr 2011

See all articles by Maarten Pieter Schinkel

Maarten Pieter Schinkel

University of Amsterdam - Department of Economics; Tinbergen Institute

Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE); Tinbergen Institute

Jakob Rüggeberg

University of Amsterdam - Department of Economics (AE)

Date Written: April 1, 2008

Abstract

In its landmark ruling in Illinois Brick Co. v. Illinois, the U.S. Supreme Court restricted standing to sue for recovery of damages suffered from a breach of federal antitrust law to direct purchasers only. Even though typically antitrust injury is, at least in part, passed on to firms lower in the production chain and ultimately to consumers, Illinois Brick is binding precedent in a majority of states. In this paper, we draw attention to a strategic abuse of the rule as a shield against antitrust damages claims. We show that Illinois Brick facilitates upstream firms to engage horizontally in a collusive arrangement by focussing concealed vertical side-payments to discourage civil action on their direct purchasers only. Downstream firms are passed part of the upstream cartel profits through a symmetric rationing of their inputs at low prices. This 'Illinois Wall' arrangement sustains collusion in the production chain, substantially reducing total welfare. The more competitive the up- and downstream industries otherwise are, the more scope there is for the arrangement. Illinois Walls are shown to be resilient to entry, as well as to variations in the legal system. Several recent U.S. cartel cases display Illinois Wall symptoms.

Keywords: Antitrust, treble private damages, Illinois Brick, tacit collusion, vertical restraints, rationing

JEL Classification: D4, L1, L4

Suggested Citation

Schinkel, Maarten Pieter and Tuinstra, Jan and Rüggeberg, Jakob, Illinois Walls: How Barring Indirect Purchaser Suits Facilitates Collusion (April 1, 2008). Tinbergen Institute Discussion Paper No. TI 2005-049/1; RAND Journal of Economics, Vol. 39, No. 3, pp. 683-698; Amsterdam Center for Law & Economics Working Paper No. 2005-02. Available at SSRN: https://ssrn.com/abstract=730384

Maarten Pieter Schinkel (Contact Author)

University of Amsterdam - Department of Economics ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 7132 (Phone)
+31 20 525 5318 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Jakob Rüggeberg

University of Amsterdam - Department of Economics (AE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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