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Abstract

In the absence of antitrust regulations, rational profit-maximizing firms in an oligopoly may freely act in consort to reach a consensus and to maintain prices above the competitive level. However, in light of potential exposure to antitrust investigations and prospective heavy sanctions, firms attempt to achieve collusive outcomes without resorting to explicit agreements. One mechanism that may promote such tacit collusion is information-sharing; that is, the otherwise competing firms exchange their private information in order to set and maintain supra-competitive prices. Thus far, the attention of the antitrust authorities and scholars has focused on the phenomenon of horizontal information-sharing, i.e., the exchange of information between rival firms that operate at the same economic level. Contrary to this body of work, this article focuses on the effect of vertical information-sharing on the ability of the firms to collude. Recently, it has been shown that when competing retailers disclose their private information to a mutual manufacturer, the wholesale price set by the latter provides a signal to the retailers. This signal allows the retailers to fix prices without the necessity of any direct communication between them, thereby achieving a collusive outcome while avoiding the risk of being exposed to the scrutiny of the antitrust authorities. Another fascinating aspect of the collusion achieved through vertical informationexchange is that it can generate social costs higher than those of direct collusion. In other words, from the social welfare perspective, in certain instances—such as those discussed in this article—the social planner would be better off allowing competing firms to collude directly, rather than exchanging their private information via their mutual manufacturer. Therefore, understanding the neglected impact of vertical information-sharing is important not only for effective antitrust laws, but also for developing effective policies and regulations. Calling into focus the strategic behavior of competing retailers that may produce outcomes similar—or even severer—than those resulting from collusive agreement based on horizontal information-sharing, this article is the first attempt to address the legal implications of such a scheme, while integrating the findings of the economic literature. In particular, this article argues that: antitrust authorities should broaden the scope of their scrutiny to include vertical informationsharing; and case law permits such information-sharing to be condemned under the Sherman Act if it produces anticompetitive effects without counterbalancing procompetitive effects.

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