Collusion between Vertical Hierarchies under Asymmetric Information

Collusion between Vertical Hierarchies under Asymmetric Information

Yaron Yehezkel

Coller School of Management , Tel-Aviv University

Abstract

The paper considers an infinitely repeated competition between vertical manufacturer-retailer hierarchies. In every period, retailers privately observe the demand, consequently manufacturers pay retailers “information rents”. I compare between several collusive equilibria that differ in the profits on which firms collude and in the level of retailers’ involvement. I find that including forward-looking retailers in the collusive scheme may facilitate or hinder collusion, depending on the likelihood of a high demand and the gap between a high and a low demand. Moreover, collusion on monopoly profits can be easier or more difficult to implement than collusion on upstream profits.