Umbrella Effects

Posted by D. Daniel Sokol

Roman Inderst, University of Frankfurt; Imperial College London Frank P. Maier-Rigaud, IESEG School of Management, Department of Economics and Quantitative Methods; Lille - Economics & Management (LEM) - Centre National de la Recherche Scientifique; Organisation for Economic Co-operation and Development (OECD) - Competition Division; European Commission, DG Competition; Laboratory for Experimental Economics, University of Bonn; Max Planck Institute for Research on Collective Goods and Ulrich Schwalbe, University of Hohenheim discuss Umbrella Effects.

ABSTRACT: 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.