A theory of hub-and-spoke collusion |
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| Institution: | 1. Department of Applied Economics, HEC Montréal, Canada;2. CEPR, United Kingdom;3. Belgian Competition Authority, Belgium;4. ECARES, Université Libre de Bruxelles, Belgium;1. Department of Business Economics & Public Policy, The Wharton School, University of Pennsylvania;2. Coller School of Management, Tel Aviv University;1. Department of Economics, Frankfurt School of Finance & Management, Frankfurt am Main 60314, Germany;2. Department of Economics and MaCCI, University of Mannheim, Mannheim 68131, Germany;3. CEPR, CESifo, and ZEW UK;1. University of Wisconsin-Milwaukee, Milwaukee, WI, USA;2. School of International Trade and Economics, University of International Business and Economics, China;3. Hanqing Advanced Institute of Economics and Finance, Antitrust and Competition Policy Center, School of Economics, Renmin University of China, 59 Zhongguancun Street, Beijing 100872, China |
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| Abstract: | We develop a model of hub-and-spoke collusion between a manufacturer and two retailers. Demand is stochastic, and collusion between retailers is difficult; the best collusive equilibrium is inefficient (Rotemberg and Saloner (1986)). In the hub-and-spoke collusive agreement, retailers transmit their information about the state of demand to the supplier. The supplier uses this information to adjust the wholesale price. By organizing the collusion, the supplier increases profits of the vertical chain. We show that, surprisingly, this type of collusive agreement can under some conditions improve consumer welfare. |
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