Cartels may be Good for You

In this paper we analyse a generalization of vertical monopolies in which monopoly suppliers trade essential inputs with one another. The most obvious applications of the model, which we call symbiotic production, are to postal and telecommunications services. We show how producers can use per-unit tariffs to achieve cooperative outcomes without colluding directly over consumer prices. We then show the firms have an incentive to collude in the setting of tariffs but that such collusion will lower consumer prices. In a world of monopoly suppliers, cartelization of the monopolies improves consumer welfare. This benign view of cartels assumes that the monopoly suppliers are otherwise unfettered. In contrast, if the constituent monopolies are regulated, we show that collusion enables the firms to completely undo the restraints of regulation. The model has important policy implications for the international telecommunications market.