Simon Business School

Colluding Through Suppliers

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In a new study, Assistant Professor Jeanine Miklós-Thal shows that retailers can collude more easily on the prices consumers pay by also agreeing among them to pay above-cost wholesale prices and slotting fees to their suppliers.

“Colluding Through Suppliers” is the first to look at collusion on wholesale prices as a method to facilitate collusion on output prices.

“We wanted to work on a model that looks at collusion when inputs are purchased through supply contracts,” says Miklós-Thal, who co-authored the study with Salvatore Piccolo of Universitá Cattolica del Sacro Cuore.

Previous studies about collusion, with a few exceptions, have ignored the vertical relations between wholesalers and retailers—specifically supply contract negotiations. These studies have viewed such contract costs as fixed, Miklós-Thal says.

“Colluding Through Suppliers” examines collusion through the repeated interaction between wholesalers and retailers. The authors’ model allowed for variables in both input and output prices and found that collusion is possible more often if the cartel of retail firms fixes both output and input prices, Miklós-Thal says.

“Sustaining a cartel on output prices is easier if you can also agree on contracts you provide your suppliers—that is, the prices you pay them,” she says.

Retailing trends in the last two decades have fueled debate over antitrust policy, and the study weighs in. One trend is a major shift in bargaining power from manufacturers to retailers, which has triggered widespread concerns about the competitive effects of “buyer power.” The study shows the shift in bargaining power from suppliers to retailers increases the chance that collusion will occur.

The second trend in retailing is a rise in complex contractual agreements, particularly slotting fees paid by manufacturers to retailers for shelf space. “Slotting fees are essential because they enable the retailer cartel to agree on a wholesale price above marginal cost without harming their own profits on the collusive path,” the authors write.

Regulators could reduce the risk of collusion if they banned slotting fees and information sharing by retailers about wholesale supply contracts.

 
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