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Umbrella Effects

  • Roman Inderst

    (Johann Wolfgang Goethe-Universität, Frankfurt/Main)

  • Frank Maier-Rigaud


    (IESEG School of Management (LEM-CNRS))

We analyse the key determinants of umbrella effects, which arise when the price increase or quantity reduction of a cartel diverts demand to substitute products. Umbrella effects arise irrespective of whether non cartelists act as price takers (“competitive fringe”) or respond strategically to the increased demand. Sizable umbrella effects can also arise when non-cartelists are outside the relevant market (in the sense of a SSNIP test), provided that the cartel’s price increase is substantial. Further, a shift of demand to non-cartelists, triggering a price increase, can be induced also when their purchasers themselves benefit from higher demand as rivals purchase from the cartel and pass-on the respective price increase. To identify the actual damage it is thus key to take into account the overall adjustments among cartel members and outsiders as well as their respective, potentially competing purchasers. We also discuss how future analysis of the endogenous formation of cartels with partial market coverage should inform theories of the determinants of umbrella effects.

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Paper provided by IESEG School of Management in its series Working Papers with number 2013-ECO-17.

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Length: 22 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:ies:wpaper:e201317
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  1. Marc Escrihuela, 2002. "Cartel Sustainability And Cartel Stability," Working Papers. Serie AD 2002-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  2. Hay, George A & Kelley, Daniel, 1974. "An Empirical Survey of Price Fixing Conspiracies," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 13-38, April.
  3. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  4. Iwan Bos & Joseph E. Harrington, Jr, 2010. "Endogenous cartel formation with heterogeneous firms," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 92-117.
  5. Valerie Y. Suslow, 2005. "Cartel contract duration: empirical evidence from inter-war international cartels," Industrial and Corporate Change, Oxford University Press, vol. 14(5), pages 705-744, October.
  6. Escrihuela-Villar, Marc, 2008. "Partial coordination and mergers among quantity-setting firms," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 803-810, May.
  7. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
  8. Reinhard Selten, 1973. "A Simple Model of Imperfect Competition, where 4 are Few and 6 are Many," Center for Mathematical Economics Working Papers 008, Center for Mathematical Economics, Bielefeld University.
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