Supplier Retaliation and the Illinois Brick Rule

I analyze a two-stage game of incomplete information in which a supplier is uncertain regarding a retailer’s propensity to sue. In the first stage, the retailer decides whether to file an antitrust claim against its supplier. In the second stage, the supplier decides whether to retaliate by refusing to supply the input. Choosing to sue in the first stage signals a high propensity to bring additional costly litigation in the future. When the retailer’s claim is relatively small, the threat of a refusal to deal can deter the retailer from initiating litigation against the supplier. Permitting indirect purchaser suits may strengthen private antitrust enforcement in these settings. However, when the retailer’s claim is large, the supplier does not retaliate. A reversal of the Illinois Brick rule weakens private antitrust enforcement in this case by dividing the right to sue between direct and indirect purchasers.