Buyer resistance for cartel versus merger

- We model the choice of suppliers to merge or collude.
- In the model, buyers can resist high prices by qualifying additional suppliers.
- In response to buyer resistance, firms may prefer collusion over merger.
- We relate our results to the data.
- We discuss implications for antitrust and merger policy.

Procurement practices are affected by uncertainty regarding suppliers' costs, the nature of competition among suppliers, and uncertainty regarding possible collusion among suppliers. Buyers dissatisfied with bids of incumbent suppliers can cancel their procurements and resolicit bids after qualifying additional suppliers. Recent cartel cases show that cartels devote considerable attention to avoiding such resistance from buyers. We show that in a procurement setting with the potential for buyer resistance, the payoff to firms from forming a cartel exceeds that from merging. Thus, firms considering a merger may have an incentive to collude instead. We discuss implications for antitrust and merger policy.