Faculty of Economics and Business Administration Publications Database

Umbrella Effects

Authors:
Maier-Rigaud, Frank
Schwalbe, Ulrich
Source:
ISSN-Print: 1744-6414
Link External Source: Online Version
Year: 2014
Abstract:

We analyze the key determinants of umbrella effects, which arise when a cartel causes a price increase or quantity reduction that diverts demand to substitute products. Umbrella effects arise irrespective of whether non-cartelists act as price takers (“competitive fringe”) or respond strategically to the increased demand. Sizable umbrella effects can also arise when non-cartelists are outside the relevant market, as defined by the hypothetical monopolist test (HMT), provided that the cartel's price increase is substantial. Further, a shift of demand to non-cartelists can also occur when firms that purchase products or inputs from the cartelists pass on the price increase to their rivals that purchase from non-cartelists, who may benefit from higher demand. To identify the actual damage of umbrella effects, it is thus key to take into account the overall adjustments among cartel members and outsiders, as well as among their respective, potentially competing purchasers. We also discuss how future analysis of the endogenous formation of cartels with partial market coverage should inform theories of the determinants of umbrella effects.

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