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January 11, 2024: Johannes Muthers (Freie University Berlin)

Credibility of Secretly Colluding Manufactures in Retail Contracting

Abstract

With two exclusive manufacturer-retailer pairs and secret contracting, we show that potential strategic misinterpretations and misunderstandings by retailers are important for the feasibility of manufacturer collusion in vertically related markets. We model the retailer’s (potentially incorrect) expectations about their competitor’s wholesale price offers. If retailer’s believe collusion to be infeasible or do not foresee manufacturers’ punishment strategies, it is impossible for manufacturers to collude. By contrast, if retailers anticipate the collusive strategy and condition their action on past offers, collusion becomes feasible. We introduce the property of opportunism-proofness that excludes profitable joint deviations by the collusive entity and discuss adaptive beliefs.