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Hub-and-spoke collusion is a type of cartel in which competitors coordinate through their vertical relationships, that is, through actors located upstream (suppliers) or downstream (distributors or customers). In these cases, the common supplier or distributor acts as an intermediary or “messenger” among the colluding parties.
They are called hub-and-spoke in reference to the image of a wheel: the collusion is structured so that the hub serves to coordinate the spokes. Unlike the classic model of direct and explicit collusion between competitors, in this type of collusion the cartel members appear to have no connection thanks to a third actor who facilitates indirect coordination between them.
This particular form of collusion poses serious challenges for enforcement agencies. On one hand, there are practical obstacles in detection, as contacts and dealings between suppliers and distributors are part of daily business, and may even result in arrangements that are desirable from a consumer welfare perspective. In other words, distinguishing illegal conduct from standard business activity can be a daunting task.
On the other hand, there are legal and evidentiary challenges in each jurisdiction. In order to be sanctioned as collusion, it is not enough to prove potentially harmful or suspicious communications between supplier and distributor. It will usually be necessary to go further—for example, to demonstrate that there is a mutual arrangement or common understanding among cartel participants, and/or that the companies’ conduct matches the terms of the agreement.
Another distinguishing feature of hub-and-spoke collusion cases is that they usually involve some form of resale price maintenance (RPM) between upstream and downstream actors, or equivalent vertical restraints (most-favored-nation clauses, exclusivities, or loyalty discounts/rebates). These vertical restraints are often used as tools to implement and monitor horizontal collusion.
At a time when the digital economy is gaining prominence, the study of hub-and-spoke collusion has also taken on greater relevance. E-commerce—along with price algorithms, monitoring software, and online distribution platforms—could be used to support such agreements (OECD, 2019).
Depending on the jurisdiction, the requirements to establish a hub-and-spoke collusion differ.
In the United States, following a long tradition of prosecuting such cartels, the so-called “standard of inference” is commonly applied. Case law in that country requires that there be additional elements accompanying the vertical conduct that allow the inference of a horizontal conspiracy (Orbach, 2016). This additional element is the rim that connects the spokes to the hub, and it may be found in the same vertical relationship in question, as well as in other contextual plus factors.
In Europe and the United Kingdom, the standard has followed a different path, focusing on the exchange of information. Based on the interpretation of British court rulings (for example, the Argos/Littlewoods/Hasbro and Replica Football Kit cases), it has been argued that the plaintiff’s allegations must pass a two-dimensional test: one in which objective conduct is proven and another that concerns the subjective elements of those involved (see, for example, Odudu’s interpretation, 2011, and a summary in OECD, 2019).
In the first dimension, the triangular relationship between the colluding actors (A and C) and the intermediary acting as the hub (B) must be established:
Additionally, in the subjective dimension, for a hub-and-spoke collusion to exist, the British test requires that:
Indeed, the concern that certain exchanges of information between supplier and distributor could give rise to unlawful conduct has led European scholars to study in detail the permitted and prohibited flows and contacts between supplier and distributor, depending on their relationship and the structure of the market (Whelan, 2009).
These differences in approach on both sides of the Atlantic were analyzed by the OECD in one of its Competition Committee roundtables (OECD, 2019).
Economist Joseph Harrington has compiled nine case studies of hub-and-spoke collusion in European and North American jurisdictions, with details on their duration, time of detection, and competitive analysis, available in Harrington (2018).
Below are three emblematic examples from different jurisdictions analyzing the hub-and-spoke mechanism:
The first case with hub-and-spoke features investigated and sanctioned in the U.S. dates back to 1939 (Interstate Circuit v. US). Decided by the U.S. Supreme Court, it involved an agreement orchestrated by Interstate Circuit, owner of 43 movie theaters operating in several cities—one of the two largest cinema chains in the country at the time. The company allegedly sent letters to coordinate at least eight upstream film distributors, who never had contact with each other.
At the time, the U.S. film market operated with theaters that screened both premieres and second-run films. Premieres had higher prices (40 cents) and were shown only once a day. In contrast, second-run films were screened multiple times daily at much lower prices. Many of Interstate’s competitors were second-run theaters, competing aggressively on price (charging as little as 15 cents per screening).
Concerned about the impact of this competition on ticket sales for premieres, Interstate orchestrated a scheme whereby distributors would force competing theaters not to charge less than 25 cents and to show only one film per day—under the threat of not distributing their titles to them. In turn, if the distributors did not comply with their part of the deal, Interstate would deny them access to its own theaters to release the films.
In addition to a letter sent to all distributors—which noted that the same letter was being sent to the others—bilateral meetings were held with the Interstate representative. As Harrington explains, informing each upstream firm that the other upstream firms were being asked to comply created a horizontal dimension to the conduct and was essential to the success of Interstate’s plan, because it would not have been in the interest of any upstream firm to comply alone unless it believed that a sufficient number of other upstream firms would do so as well (Harrington, 2018).
This case was investigated and sanctioned by the UK’s Office of Fair Trading (OFT, predecessor of today’s Competition and Markets Authority) in 2003 (CA98/8/2003), and confirmed by both the Competition Appeal Tribunal ([2004] CAT 24) and the Court of Appeal ([2006] EWCA Civ 1318).
The agreement took place between the upstream toy supplier Hasbro and two of London’s largest retailers at the time, Argos and Littlewoods. Hasbro, acting as the hub of the collusion, negotiated individually with each retailer the resale pricing policy to be followed, setting recommended resale prices (RRPs). The coordination began with a subset of action figures and progressively expanded to more products.
Since each retailer feared the other might not comply with the agreement by undercutting the manufacturer’s suggested prices, they continuously monitored each other’s semiannual catalogs and asked Hasbro to intervene when deviation was suspected—without ever contacting each other directly. The toy company, which ultimately applied for leniency with the OFT, not only monitored the arrangement but also executed it, providing Argos and Littlewoods with assurance that the coordination would not fail.
The Chilean experience with hub-and-spoke cartels is still incipient. The most important case that has been formally addressed as such is the Supermarkets Case, although features of a hub-and-spoke coordination scheme had already appeared in the earlier Pharmacies Case (FNE v. Farmacias Ahumada and others), due to the mediating role played by upstream actors (in that case, pharmaceutical laboratories).
In the Supermarkets Case, decided in 2019 by Chile’s Competition Tribunal (TDLC), the National Economic Prosecutor’s Office (FNE) accused the country’s three main supermarket chains—Cencosud, SMU, and Walmart—of having agreed to minimum resale prices for promotional sales of fresh chicken, coordinated through their suppliers, the poultry producers.
Specifically, the chains were said to have monitored and demanded that competitors apply a rule preventing sales below the acquisition cost (or “list price”) of the chicken. The companies allegedly acted with knowledge that their competitors were also complying with the same rule, and they consistently monitored potential deviations, reporting them to their common suppliers.
The TDLC ruled in favor of the FNE and sanctioned the companies. The following year, the ruling was upheld by the Supreme Court.
In its analysis, although explicitly referencing both standards mentioned in the previous section (the U.S. and the European), the TDLC rejected applying the UK test to the case:
“[these casas] refer, essentially, to a problem of information exchange mediated by a third party, known as ABC-type hub-and-spoke” (Judgment 167/2019, para. 22). “Although it is probably the most common type of hub-and-spoke agreement […] it is not the only form this type of agreement can take” (para. 23).
Instead, the court focused its inquiry on whether the “merely vertical” agreements between supermarkets and their chicken suppliers included a “common element that horizontalized them,” that is, “whether each chain complied with its respective agreement on the understanding that the others would do so as well and demanded such compliance from the others” (para. 24).
For more on the Supreme Court ruling, see CeCo article: “Supermarkets Case: Hub and Spoke and Compliance Programs.”
