Does Aftermarket Monopolization Facilitate Upstream Collusion?

Abstract This article explores the stability of collusion among upstream firms selling to downstream firms with an aftermarket. Consumer lock-in due to aftermarket monopolization prevents the deviating firm from capturing the aftermarket of its rivals which reduces the deviation profits. On the other hand, the deviation firm locks in the old consumers in the aftermarket, which mitigates the severity of the punishments. The latter effect dominates the former, making collusion unstable in the aftermarket monopolization case. Ironically, when the size of the monopolistic aftermarket is large enough, increasing the aftermarket size stabilizes the collusion. In contrast to prior literature, there is an inverted U-shaped relationship between the stability of collusion and collusive prices in the presence of an aftermarket.