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Will managerial delegation impede upstream collusion?

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Abstract

We investigate the collusive incentive for far-sighted manufacturers selling via managerial retailers. In contrast to the existing literature, we find that revenue delegation can impede upstream collusion in Bertrand models. This happens due to market exit in the deviation phase when products are close substitutes. The result of managerial delegation hindering upstream collusion is robust if we allow manufacturers to consider partial collusion. Furthermore, we show that less intensified downstream competition does not always harm consumers. If upstream collusion is less sustainable with managerial retailers, consumers can be better-off.

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Notes

  1. The assumption of exclusive dealing precludes the downstream firm buying from a different upstream firm and therefore softens competition in the upstream market. It is restrictive but quite standard in the literature on vertically related markets. Besides exclusive retailing, this model also applies to markets where downstream firms produce differentiated products and upstream firms independently supply inputs to each of them. For example, pharmaceutical companies producing biosimilar drugs require distinct inputs for different chemical reactions.

  2. The asymmetry of wholesale prices can arise as an equilibrium result in our paper. With a different focus, Mendi (2009) studies downstream collusion with exogenous cost asymmetry. In that paper, the role of one cartel member is enriched after backward integration by allowing for selling input to the other member.

  3. We study tacit collusion among manufacturers in a setting where the wholesale demand is endogenously determined by the Nash equilibrium of a downstream Bertrand game. Plenty of studies show how the collusion stability can be affected by other parties’ strategic behaviors, but from different angles. For instance, Correia-da Silva and Pinho (2018) studies collusion among private firms who compete with public firms in a mixed oligopoly.

  4. Our paper focuses on a linear demand specification in order to present explicit calculations, particularly for the discount factors. For the existence and characterization of downstream equilibria with general demand or more firms, we refer to Ledvina and Sircar (2011a, 2011b).

  5. We refer to Kopel and Pezzino (2018) for a survey.

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Acknowledgements

We are indebted to the Editor and anonymous reviewers for valuable suggestions. The early version of this paper was written when Han was at Wenlan School of Business. We thank participants at the Japanese Economic Association 2017 Spring Meeting for helpful advice and comments. Any remaining errors are our own.

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Authors and Affiliations

  1. Wenlan School of Business, Zhongnan University of Economics and Law, 182# Nanhu Avenue, Wuhan, 430073, Hubei, China

    Leonard F. S. Wang

  2. Department of Economics, The Ohio State University, 410 Arps Hall, 1945 N High Street, Columbus, OH, 43210, USA

    Han Wang

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  1. Leonard F. S. Wang
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Correspondence to Han Wang.

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Wang, L.F.S., Wang, H. Will managerial delegation impede upstream collusion?. J Econ 134, 127–146 (2021). https://doi.org/10.1007/s00712-021-00741-z

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