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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"Endogenous cartel formation with heterogeneous firms,"
RAND Journal of Economics,
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