Thursday, July 26, 2018

Do Agency Contracts Facilitate Upstream Collusion?

Yoshifumi Hino, Vietnam National University (VNU) - Vietnam-Japan University, Susumu Sato, University of Tokyo - Graduate School of Economics, and Yusuke Zennyo, Graduate School of Business Administration, Kobe University ask Do Agency Contracts Facilitate Upstream Collusion?

ABSTRACT: This paper studies whether the agency contract facilitates upstream collusion as compared to the wholesale contract. To this end, we first develop an infinitely repeated game with a monopoly platform and multiple manufacturers. We derive the critical discount factors, above which the upstream collusion can be sustained, for each contract. The analysis shows that, without platform competition, the critical discount factor is higher under the agency contract than under the wholesale contract, which indicates that the agency contract does not facilitate the upstream collusion, because the monopoly platform has no incentive to foster the collusion among manufacturers. By contrast, in the extended model with competing platforms, the agency contract does facilitate the upstream collusion. This is because, with the platform competition, upstream collusion under the agency contract works as a coordination device to ease the platform competition, leading the platforms to accept it. Our analysis provides an important policy implication such that the agency contract itself is not anticompetitive, but should be regulated when there exists the platform competition.

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