Many recent cartels in the EU and the UK (e.g., coffee, sweets, pet food, beer, beauty and personal hygiene, and baby products) involve producer cartels colluding on wholesale prices AND including retailers in the cartel, e.g., by imposing minimum retail prices. This feature is not yet well understood by the economic literature: Why do producer cartels want to raise retail prices if cartel profits are wholesale prices times retail demand? This is counterintuitive because demand likely decreases with higher retail prices, which, in turn, reduces the profits of producer cartels.
In the paper awarded the 2023 International Journal of Industrial Organization Best Paper Award — How resale price maintenance and loss leading affect upstream cartel stability: Anatomy of a coffee cartel —Emanuel Holler (Economist at AlixPartners) and Dennis Rickert (Associate Professor at MINES Paris, PSL University) provide empirical evidence that producers need to involve retailers in the cartel and share cartel profits to increase cartel stability. Furthermore, the authors show that retailers can cause cartel breakdowns during high-demand periods, especially when the cartel product is a loss leader, a product for which retailers have incentives to decrease prices to attract consumers and stimulate sales of more profitable goods.
The study analyses the stability of the German coffee producer cartel, active from 2003 through 2008, which sold roasted coffee through retailers to final consumers. This cartel is particularly interesting because it colluded under two different regimes: Cartel Regime 1 involved collusive wholesale prices in 2003, and Cartel Regime 2 included collusive wholesale prices with additional minimum retail prices from 2005 through 2008. Another notable feature of the cartel is that the retailers used the cartelized product as a loss leader, especially during high-demand periods, such as national holidays.
The authors show that the damage of the German coffee producer cartel is moderate and short-lived in Cartel Regime 1, where producers collude on wholesale prices and retailers do not join the cartel. The reason is that retailers can protect consumers from producer cartels in two ways. First, retailers absorb part of the collusive wholesale price increase in their markups, especially when consumers are price- sensitive and retailers cannot pass on the wholesale price increase to consumers. Second, retailers could reject the collusive wholesale prices and threaten to replace the cartel’s product with alternative products that are less costly for retailers and consumers.
Furthermore, the study shows that the harm for consumers from the cartel is large and significant in Cartel Regime 2, where producers collude on wholesale prices AND include retailers by imposing minimum retail prices. This Cartel Regime 2 results in higher overcharges for consumers and longer cartel duration compared to a producer cartel without retail participation. Therefore, imposing minimum retail prices is an effective strategy for producers to stabilize collusive agreements.
Another notable insight is that the high-demand periods around national holidays caused problems for the coffee cartel, especially because the cartelized product was a loss leader. The empirical analysis shows that the coffee cartel could not sustain collusive overcharge during national holidays because retailers caused cartel breakdowns due to their loss-leading strategies. Therefore, loss-leading incentives during high-demand periods had a destabilizing effect on the coffee cartel.
The coffee cartel is a case in point for describing general cartel functioning in markets like grocery and food, where producers sell their products through retailers to final consumers and where price, not service, is the main decision variable. In such markets, producers likely need to involve retailers in the cartel, which leads to higher cartel overcharges and longer cartel duration and which, therefore, supports the anti- competitive nature of price floors and strict resale price maintenance. Furthermore, grocery and food retailers often use multiple loss leaders, such as milk, sugar, alcohol, bread, and bakery products. For such loss leaders, retailers can have a destabilizing role in joint cartels, especially during high-demand periods.