Symposium: Vertical Restraints and Collusion

How do cartels use vertical restraints? Horizontal and vertical working in tandem

The role of vertical relationships in facilitating collusion is often obscured because both economic and legal frameworks encourage us to characterize inter-firm relationships as either horizontal or vertical. A review of European Commission horizontal cartel cases found that a large share make use of vertical relationships to sustain, and sometimes to disguise, their collusive behavior. This paper provides a typology for classifying and understanding how vertical relationships can support horizontal collusion. Vertical relationships can do this both by changing the incentives and the information of market participants and by changing what is visible to competition authorities. In some cases, multiple vertical relationships simply mask explicit collusion. In other cases, vertical relationships make collusion more stable than would be the case absent the active role of upstream and downstream firms.

Maximum Resale Price Maintenance and Retailer Cartle Profits: Evidence from the Indian Pharmaceutical Industry

In jurisdictions where maximum resale price maintenance (MRPM) is per se legal, manufacturers can compete for a retailer cartel’s patronage by selectively increasing the maximum resale price consumers pay but not the price the retailer cartel pays. The retailer cartel can effectively collude on maximum resale price, which serves as a focal point, allocate market shares among manufacturers based on the retail margins they receive, and, as a punishment, boycott manufacturers offering low margins. In such a setup, MRPM raises retailer profits and undermines consumer welfare by promoting the growth of manufacturers with relatively higher margins. Using data on the pricing of pharmaceuticals in India, we test these predictions and find consistent evidence. Overall, our results indicate that vertical price restraints such as MRPM, although considered welfare enhancing and per se not illegal under US jurisprudence, can sometimes facilitate horizontal collusion among manufacturers and/or retailers.