Does input purchase cooperation foster downstream collusion?

Abstract

We set up a model where two retailers compete downstream and buy their inputs from a single producer. Retailers may collude downstream, when fixing the retail price and cooperate upstream by jointly negotiating the wholesale price with the producer. We find that purchase cooperation renders downstream collusion more likely. First it expands the range of differentiation where downstream collusion is a profitable strategy. Second it makes more stable the agreement downstream since the punishment becomes harsher due to the increase in the wholesale price coming from the breakdown of common upstream negotiation. The results are robust to a scenario of upstream price rigidity where the wholesale price cannot be immediately renegotiated after a deviation downstream has occurred.