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Manufacturer collusion: Strategic implications of the channel structure
Author(s) -
Reisinger Markus,
Thomes Tim Paul
Publication year - 2017
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12209
Subject(s) - tacit collusion , collusion , industrial organization , business , monopoly , profit (economics) , microeconomics , distribution (mathematics) , market structure , profit margin , cournot competition , economics , marketing , mathematical analysis , mathematics
We investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find—in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits—that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level. This lowers industry profits but increases the profit share that manufacturers appropriate from the retailer. Comparing common distribution with independent (exclusive) distribution, we show that the latter facilitates collusion. Despite this result, common retailing leads to lower welfare because a common retailer monopolizes the downstream market. For the case of independent retailing, we also demonstrate that contract offers that are observable to the rival retailer are not necessarily beneficial for collusive purposes.