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Does Input Purchase Cooperation Foster Downstream Collusion?

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  • Aldo González
  • Loreto Ayala

Abstract

We set up a model where two retailers compete downstream and buy their inputs from a single producer. Retailers may collude downstream, when fixing the retail price and cooperate upstream by jointly negotiating the wholesale price with the producer. We find that purchase cooperation renders downstream collusion more likely. First it expands the range of differentiation where downstream collusion is a profitable strategy. Second it makes more stable the agreement downstream since the punishment becomes harsher due to the increase in the wholesale price coming from the breakdown of common upstream negotiation. The results are robust to a scenario of upstream price rigidity where the wholesale price cannot be immediately renegotiated after a deviation downstream has occurred.

Suggested Citation

  • Aldo González & Loreto Ayala, 2012. "Does Input Purchase Cooperation Foster Downstream Collusion?," Working Papers wp358, University of Chile, Department of Economics.
    • Handle: RePEc:udc:wpaper:wp358
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    References listed on IDEAS

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    5. Zhiqi Chen, 2004. "Countervailing Power and Product Diversity," Econometric Society 2004 North American Winter Meetings 279, Econometric Society.
    6. Dobson, Paul W. & Waterson, Michael, 2007. "The competition effects of industry-wide vertical price fixing in bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 935-962, October.
    7. von Ungern-Sternberg, Thomas, 1996. "Countervailing power revisited," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 507-519, June.
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    Cited by:

    1. Filippini Luigi & Vergari Cecilia, 2017. "Vertical Integration Smooths Innovation Diffusion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(3), pages 1-22, July.
    2. Pedro Gonzaga & António Brandão & Helder Vasconcelos, 2014. "Theory of Semi-Collusion in the Labor Market," FEP Working Papers 522, Universidade do Porto, Faculdade de Economia do Porto.

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