Price Discrimination in Cartels

This paper analyzes price discrimination of an upstream cartel in the presence of a dominant firm at the retail level. Charging different wholesale prices creates a bond between the upstream cartel and the favored downstream firm. This bond reduces or eliminates this firm's incentives to accept deviation offers from upstream cartel members. When a cartel price discriminates in favor of the dominant downstream firm, it is able to implement prices above cost for any strictly positive value of the discount factor. This conclusion is robust with respect to the type of downstream competition, the form of contracts and the observability of offers. I also discuss the effect of vertical mergers on cartel sustainability in this setting