Efficient Cartelization Through Buyer Groups

Abstract

In industries with unobservable wholesale contracting, retailers may enjoy cartel rents in their output market through the formation of a buyer group in their input market. A buyer group allows retailers to credibly commit to increased input prices, which serve to reduce combined final output to the monopoly level; increased input costs are then refunded from suppliers to retailers through slotting allowances or rebates. The stability of such an 'implied cartel' depends on the retailers' incentives to secretly source from a supplier outside of the buyer group arrangement at lower input prices. Cheating is limited if retailers sign exclusive dealing or minimum purchase provisions. If the buyer group brings about cost efficiencies, the mechanism may be stable for every discount factor, while consumer welfare may actually be raised above competitive levels.