Hit where it hurts: Cartel policing using targeted sales and supply embargoes

Abstract

In this paper, we examine an asymmetric-punishment strategy that a large and newly identified cartel of retailers uses to police its upstream suppliers and members. The cartel punishes suppliers who violate vertical restraints and members who defect in the key regional or product market where it hurts them the most. The cartel organizes sales embargoes to punish its suppliers and supply embargoes to punish its members. Cartels can leverage the targeted punishment strategy to induce good behavior across multiple product, regional, and vertical markets. We examine several episodes in which the association of retail pharmaceutical traders in India, acting as a cartel, imposes sales embargoes on select pharmaceutical firms and supply embargoes on its members, and we find evidence consistent with targeted punishment. Our results support the theoretical view that growing buyer power in conjunction with vertical restraints facilitates collusion.