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Illinois Walls: How barring indirect purchaser suits facilitates collusion

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  • Rüggeberg, J.

    (Universiteit van Maastricht)

  • Schinkel, M.P.
  • Tuinstra, J.

    ()
    (Universiteit van Amsterdam)

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 in engaging horizontally in a collusive arrangement, allowing them to focus 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 to the detriment of consumers and 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 some of their symptoms, suggesting that the abuse of Illinois Brick is a reality in U.S. industry.

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File URL: http://www1.fee.uva.nl/cendef/publications/papers/IWSTR0505.pdf
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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 05-10.

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Date of creation: 2005
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Handle: RePEc:ams:ndfwpp:05-10

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Fax: + 31 20 525 52 83
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  1. McCutcheon, Barbara, 1997. "Do Meetings in Smoke-Filled Rooms Facilitate Collusion?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 330-50, April.
  2. Joseph E Harrington Jr, 2002. "Post-Cartel Pricing during Litigation," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 488, The Johns Hopkins University,Department of Economics, revised Jun 2003.
  3. Lovell, Michael C., 1982. "Are treble damages double damages?," Journal of Economics and Business, Elsevier, Elsevier, vol. 34(3), pages 263-268.
  4. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  5. Hugh C. Briggs III & Kathleen D. Huryn & Mark E. McBride, 1996. "Treble Damages and the Incentive to Sue and Settle," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 770-786, Winter.
  6. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026272040x, December.
  7. Greenhut, M L & Ohta, H, 1979. "Vertical Integration of Successive Oligopolists," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 137-41, March.
  8. Snyder, Edward A, 1985. "Efficient Assignment of Rights to Sue for Antitrust Damages," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 28(2), pages 469-82, May.
  9. Salant, Stephen W, 1987. "Treble Damage Awards in Private Lawsuits for Price Fixing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(6), pages 1326-36, December.
  10. Baker, Jonathan B, 1988. "Private Information and the Deterrent Effect of Antitrust Damage Remedies," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 4(2), pages 385-408, Fall.
  11. F. M. Scherer, 1997. "How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 4(3), pages 239-256.
  12. Besanko, David & Spulber, Daniel F, 1990. "Are Treble Damages Neutral? Sequential Equilibrium and Private Antitrust Enforcement," American Economic Review, American Economic Association, American Economic Association, vol. 80(4), pages 870-87, September.
  13. Schinkel, M.P. & Tuinstra, J. & Rueggeberg, J., 2004. "Illinois Walls," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 04-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  14. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 58, pages 347.
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Cited by:
  1. Boone, J. & Müller, W., 2008. "The Distribution of Harm in Price-Fixing Cases," Discussion Paper, Tilburg University, Center for Economic Research 2008-68, Tilburg University, Center for Economic Research.
  2. Iwan Bos & Maarten Pieter Schinkel, 2009. "Tracing the Base: A Topographic Test for Collusive Basing-Point Pricing," Tinbergen Institute Discussion Papers 09-007/1, Tinbergen Institute.
  3. Iwan Bos & Maarten Pieter Schinkel, 2009. "Tracing the Base: A Topographic Test for Collusive Basing-Point Pricing," Tinbergen Institute Discussion Papers 09-007/1, Tinbergen Institute.
  4. Frank Maier-Rigaud, 2013. "Towards a European Directive on Damages Actions," Working Papers, IESEG School of Management 2013-ECO-16, IESEG School of Management.
  5. Frank Maier-Rigaud & Ulrich Schwalbe, 2013. "Quantification of Antitrust Damages," Working Papers, IESEG School of Management 2013-ECO-09, IESEG School of Management.
  6. Schinkel, M.P. & Tuinstra, J., 2005. "Illinois Walls in alternative market structures," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 05-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  7. Van Dijk, Theon & Verboven, Frank, 2007. "Cartel Damages Claims and the Passing-on Defence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6329, C.E.P.R. Discussion Papers.
  8. Roman Inderst & Frank Maier-Rigaud & Ulrich Schwalbe, 2013. "Quantifizierung von Schäden durch Wettbewerbsverstöße," Working Papers, IESEG School of Management 2013-ECO-08, IESEG School of Management.

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