Table Of ContentHub- and- Spoke Cartels
Hub- and- Spoke Cartels
Why They Form, How They Operate, and How to Prosecute Them
Luke Garrod, Joseph E. Harrington, Jr., and Matthew Olczak
The MIT Press
Cambridge, Mas sa chu setts
London, England
© 2021 Mass a chu setts Institute of Technology
All rights reserved. No part of this book may be reproduced in any form by any elec-
tronic or mechanical means (including photocopying, recording, or information
storage and retrieval) without permission in writing from the publisher.
The MIT Press would like to thank the anonymous peer reviewers who provided
comments on drafts of this book. The generous work of academic experts is essential
for establishing the authority and quality of our publications. We acknowledge with
gratitude the contributions of t hese otherw ise uncredited readers.
This book was set in ITC Stone Serif by Westchester Publishing Ser vices.
Library of Congress Cataloging-in-Publication Data
Names: Garrod, Luke, author. | Harrington, Joseph Emmett, 1957– author. |
Olczak, Matthew, author.
Title: Hub-and-spoke cartels : why they form, how they operate, and how to
prosecute them / Luke Garrod, Joseph E. Harrington Jr., and Matthew Olczak.
Description: Cambridge, Massachusetts : The MIT Press, [2021] | Includes
bibliographical references and index.
Identifiers: LCCN 2021003131 | ISBN 9780262046206 (hardcover)
Subjects: LCSH: Cartels.
Classification: LCC K3854 .G37 2021 | DDC 343.07/2—dc23
LC record available at https://lccn.loc.gov/2021003131
Contents
Preface vii
1 Introduction 1
1.1 What Is a Hub- and- Spoke Cartel? 1
1.2 Why Study Hub- and- Spoke Cartels? 3
1.3 Approach and Overview 7
2 General Analy sis of Hub- and- Spoke Collusion 11
2.1 Collusion Requires Participation, Stability, and Coordination 11
2.2 Participation, Stability, and Coordination Conditions
for a Hub- and- Spoke Cartel 14
2.3 Summary and Final Remarks 22
3 Collusion to Raise Downstream Prices: Upstream Supplier
as Hub 25
3.1 Economic Framework 25
3.2 Cases 43
3.3 General Lessons 107
3.4 Appendix: Sugar (Canada) 113
3.5 Technical Appendix 115
4 Collusion to Raise Downstream Prices: Downstream
Intermediary as Hub 129
4.1 Economic Framework 131
4.2 Cases 143
4.3 General Lessons 154
vi Contents
5 Collusion to Exclude Rival Firms 159
5.1 Economic Framework 160
5.2 Cases 168
5.3 General Lessons 193
5.4 Appendix: Automobile Retailing— General Motors (US) 197
5.5 Technical Appendix 200
6 General Assessment of Hub- and- Spoke Cartels 213
6.1 Cartel Formation 214
6.2 Cartel Operations 216
6.3 Cartel Efficiency 219
7 Competition Law and Hub- and- Spoke Collusion 223
7.1 Defining Liability 223
7.2 Proving Liability 227
Notes 239
References 265
Index 271
Preface
When competitors are concerned with the intensity of competition, they
may choose to form a cartel whereby they replace their in de pen dent con-
duct with coordination intended to limit how aggressively they compete.
Most cartels are composed exclusively of those firms that ought to be com-
peting. However, t here is a part ic u lar brand of cartel that, in addition to
those firms, includes a firm that resides either upstream or downstream
from them. Referred to as a hub-a nd- spoke cartel, they have been observed
on both sides of the Atlantic in a wide variety of markets, including con-
sumer products, such as automobiles and toys; industrial products, such as
insulation and paints; and ser vices, such as insurance and movie theaters.
As we hope to convince the reader, the inclusion of an upstream seller or
a downstream buyer in a cartel substantively affects how the cartel operates
and how it should be prosecuted. It is also essential for understanding why
a cartel forms. For all these reasons, we believe this book’s investigation of
hub- and- spoke cartels is warranted.
Collusion is a subject for which economics and the law are intrinsically
intertwined. The conduct of cartel members is influenced by the need to
achieve a stable and profitable outcome, which depends on economic forces
related to incentives and the design of strategies but is also constrained
by the l egal environment, which manifests itself in practices for avoid-
ing detection. However, most analyses of collusion fail to bring together
the economic and legal strands of the story. Economics journals publish
mathematical or econometric studies of collusion that are impenetrable to
anyone lacking formal mathematical and statistical training. Law or policy
journals publish studies by l egal scholars that, while offering a rich descrip-
tion of collusive practices and properly relating the cases to jurisprudence,
viii Preface
do not adequately deal with incentives and, more broadly, the economics
of collusion. Our approach is to blend economic and l egal analyses in order
to provide a more comprehensive picture of hub- and- spoke cartels.
While this book is relevant to anyone with an interest in collusion, it is
intended for scholars and prac ti tion ers, whether trained in economics or
the law. With the exception of some technical appendices, the pre sen ta-
tion is nonmathematical and presumes only that the reader is comfortable
with economic reasoning at the level at which an antitrust or competition
lawyer converses.
For economic scholars, the book offers a collection of facts that could be
useful for theoretical and empirical modeling of cartel formation and col-
lusive practices.1 Given that the book is the only comprehensive and sys-
tematic study of hub- and- spoke cartels, it should be useful to prac ti tion ers
engaged in litigation involving suspected hub- and- spoke collusion. Our
analy sis of many past cases would assist in constructing a theory of harm
and establishing that a set of vertical relationships forms a horizontal agree-
ment. Fi nally, a consumer who is upset for having paid too much for a toy,
an e- book, or a pound of cheese may like to learn how the cartel responsible
for the harm inflicted on them operated.
We very much appreciate the comments and suggestions of Bill Page and
three anonymous reviewers and, on an e arlier version of this book, t hose
of Steve Davies, Morten Hviid, Nic de Roos, Juan-Pablo Montero, Barack
Orbach, Peter Ormosi, Tom Ross, Pierluigi Sabbatini, and Alexis Walckiers.
We also benefited from discussing our preliminary thoughts with partici-
pants at the 2018 International Symposium on Imperfect Forms of Collu-
sion hosted by Stellenbosch University. The diligent research assistance of
Hsiang- Yen (Sam) Huang, Asad Hussain, Sin Chit (Martin) Lai, and Richard
Pletan is gratefully acknowledged. We recognize with gratitude the finan-
cial support of the Carol and Lawrence Zicklin Center for Business Ethics
Research at the Wharton School of the University of Pennsylvania.
1
Introduction
1.1 What Is a Hub- and- Spoke Cartel?
A cartel is a collection of firms that supply a market and agree to coordinate
their beh av ior for the purpose of restraining competition. Their resulting
conduct is referred to as collusion. Most commonly, collusion takes the
form of firms coordinating on a common price above the competitive level,
which raises their profits and harms buyers. Alternatively (or along with
agreeing on prices), a cartel may limit competition by coordinating com-
plementary ser vices, product traits, advertising, manufacturing capacity, or
other variables. Indeed, any way in which firms compete could be the basis
for forming a cartel for the purpose of limiting that mode of competition.
Rather than directly constraining competition for customers, collusion may
instead involve a subset of firms acting collectively to harm other firms that
are not part of the cartel. They may engage in coordinated exclusionary
actions— such as predatory pricing—to e ither drive t hose firms out of the
market or make it more difficult for them to compete. Again, consumers
are harmed, because they lose those excluded firms as effective suppliers.
The subject of this book is cartels that include an upstream supplier to
or downstream buyer from the firms that are constraining competition.
Such a cartel is referred to as a hub-a nd- spoke cartel, where the spokes are
the colluding firms in a market and the hub is the firm that resides either
upstream or downstream from those firms. Competition between spokes
is being restrained by collusion, and the hub is facilitating that collusion.
The horizontal agreement pre sent among the spokes is referred to as the
rim, for it connects the conduct of the spokes. In the canonical hub- and-
spoke cartel, that agreement to restrain competition arises not from direct
