Illinois Walls: How Barring Indirect Purchaser Suits Facilitates Collusion

In its landmark ruling in Illinois Brick Co. v. Illinois, the U.S. Supreme Court restricted standing to sue for recovery of damages su¤ered from a breach of federal antitrust law to direct purchasers only. Even though typically antitrust injury is, at least in part, passed on to \u85rms lower in the production chain and ultimately to consumers, Illinois Brick is binding precedent in a majority of states. In this paper, we draw attention to a strategic abuse of the rule as a shield against antitrust damages claims. We show that Illinois Brick facilitates upstream rms to engage horizontally in a collusive arrangement by focussing concealed vertical side-payments to discourage civil action on their direct pur-chasers only. Downstream \u85rms are passed part of the upstream cartel pro\u85ts through a symmetric rationing of their inputs at low prices. This Illinois Wall arrangement sustains collusion in the production chain, substantially reducing total welfare. The more competitive the up- and downstream industries other-wise are, the more scope there is for the arrangement. Illinois Walls are shown to be resilient to entry, as well as to variations in the legal system. Several recent U.S. cartel cases display Illinois Wall symptoms