Multimarket Contact in Vertically Related Markets

Abstract

We analyze collusion in two comparable market structures. In the first market structure, only one firm is vertically integrated; there is one independent firm in the upstream industry and another independent firm in the downstream industry. In the second market structure, there are only two vertically integrated firms that can trade among themselves in the intermediate good market. The second market structure mimics markets like the California gasoline market where firms are vertically integrated through refinery and retail markets. We rank these two market structures in terms of ease of collusion and show that while under a reasonable collusive sharing rule collusion is not possible in the market with one vertically integrated firm, collusion is possible in the market structure with two vertically integrated firms. We conclude that vertical multimarket (multilevel) contact facilitates collusion and if vertical mergers are suspected to lead to subsequent vertical mergers in an industry, then they should receive higher antitrust scrutiny relative to single isolated vertical mergers.