Working Paper: CEPR ID: DP9385
Authors: Nicolas Sahuguet; Alexis Walckiers
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 Codes: D43; L41; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Supplier bargaining power (L14) | Hub-and-spoke collusion efficiency (D43) |
| Hub-and-spoke collusion efficiency (D43) | Welfare improvements (I38) |
| Supplier bargaining power (L14) | Reduced double marginalization (J79) |
| Retailer bargaining power (L81) | Diminished consumer welfare (D11) |
| Retailer bargaining power (L81) | Collusive conduct among retailers (L42) |
| Collusive conduct among retailers (L42) | Harm to consumer welfare (D18) |