Dynamic Downstream Collusion with Secret Vertical Contracts

Abstract

We show that secret vertical contracts between a supplier and retailers can facilitate collusion in a dynamic game when competing retailers and their joint supplier all care about future profits. The more the retailers and the supplier care about future profits, retailers obtain a higher share of the monopoly profits. We also find that sustaining collusion requires retailers to commit to deal exclusively with the joint supplier and to charge slotting allowances. Hence, slotting allowances facilitate downstream collusion even when retailers do not observe their rivals’ contracts with the supplier. Also, the dynamic game can enable the supplier to charge a higher wholesale price even when retailers have the bargaining power.