Research

Working Paper

When Wholesalers Join the Cartel: Measuring Overcharge and Pass-Through in Fuel Retail

Abstract: This paper examines how the participation of wholesalers affects cartel outcomes. I extend the capacity-constrained cartel model of Bos and Harrington(2010) to allow wholesalers to charge discriminatory wholesale prices, showing that vertical collusion relaxes retailers’ incentive compatibility constraints and sustains higher retail prices and margins than horizontal cartels, while wholesale prices rise by less. I test these predictions using a novel station-level panel from the Brazilian fuel market that combines price microdata, market-structure information, and eight adjudicated cartel cases. Employing a two-step nearest-neighbor matching and a difference-in-differences design, I find that vertical cartels increase retail prices by 4.7\%—more than double the 2.1\% effect of horizontal cartels—and raise retail margins disproportionately, with modest wholesale price effects concentrated among exclusive contracts. These findings highlight the distinctive mechanics of vertical collusion and suggest that penalty rules based solely on revenues may systematically under-penalize such cartels.