Research
Working Paper
When Wholesalers Join the Cartel: How Solving Double Marginalization Raises Retail Prices
Abstract: This paper examines how wholesaler participation affects cartel outcomes and rent sharing. I extend a capacity-constrained cartel model to allow upstream wholesalers to join a downstream retail cartel, discriminate in wholesale prices, and bargain over the division of monopoly profits. Vertical collusion becomes fully inclusive and implements the monopoly price, while the negotiated wholesale prices map one-to-one into retailer-specific bargaining weights, which I recover from the data. I test the model using a novel station-level panel from the Brazilian gasoline market that combines weekly retail and wholesale prices, market-structure information, and eight adjudicated cartel cases (four horizontal, four vertical). A two-step nearest-neighbor matching combined with difference-in-differences shows that vertical cartels raise retail prices and retail margins by more than twice as much as horizontal cartels, while wholesale margins increase only modestly. The inferred bargaining weights indicate that wholesalers capture roughly 70\% of monopoly rents, yet retailers are the main beneficiaries of moving from horizontal to vertical collusion. The results challenge the view that vertical coordination is typically benign because it solves double marginalization and suggest that vertical cartels can generate substantially greater consumer harm.