Buyer Cartels: A Theoretical and Policy Framework

This paper contains a theoretical analysis cartel formation by buyers in thin markets where with a small number of buyers and sellers. Limiting the impact of buyer cartels depends critically on whether such a cartel can create barriers to entry to exclude non-cartel members from the trading process. In addition, for a buyer’s cartel to exist, cartel members need to be able to make side payments to each other which do not go through markets but are made directly each other. Allowing for bilateral cartels, the analysis shows that the formation of a cartel of sellers induces the formation of a cartel of sellers yielding a “balance” in market power on the two sides of the market.

By Sayantan Ghosal¹

I. INTRODUCTION

Typically, the analysis of collusion considers the formation of sellers’ cartels. For example, in oligopolistic markets, the formation of cartels of producers is analyzed under the assumption that demand is atomistic, so that buyers react in a competitive fashion to the choices of sellers and cartel formation among sellers is studied in detail.

While such a model is well-suited to analyze collusion in markets for consumer goods, their conclusions cannot hardly be extended to other markets, such as markets for primary commodities, where a small number of buyers and sellers interact repeatedly. Moreover, the best-known examples of cartels are actually found on thin markets with a small number of traders on both sides. Examples include the commodity