Thursday, May 14, 2009
Posted by D. Daniel Sokol
ABSTRACT: In a dynamic game between N retailers and a large number of suppliers, I show that inefficient contracting emerges as a mechanism to implement collusion among retailers, building on the natural ‘complementarity’ between retail and wholesale prices. When efficient collusion is not sustainable, this complementarity allows retailers to rely on inefficient input supply, entailing double marginalization and negative franchise fees, to squeeze the wedge between collusive and deviation profits. I also study the role of communication on the equilibrium outcomes of games where retailers have the initiative. It turns out that communication is indeed fundamental to strengthen cartels' sustainability, although generating efficiency losses.