Does Aftermarket Monopolization Facilitate Upstream Collusion?

This paper explores the stability of collusion among upstream firms that sell to downstream firms with an aftermarket. Consumer lock-in that is due to aftermarket monopolization prevents the deviating firm from capturing the aftermarket of its rivals—which reduces the deviation profits. On the other hand, this lock-in mitigates the severity of the punishments by locking in the old consumers in the aftermarket. The latter effect dominates the former, which makes collusion unstable in the aftermarket monopolization case. This effect with respect to reducing collusion stability remains robust under an asymmetric aftermarket structure. 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.