Cartel Stability under Quality Differentiation

Bos, Iwan and Marini, Marco A. (2018): Cartel Stability under Quality Differentiation.

Abstract

This note considers cartel stability when the cartelized products are vertically differentiated. If market shares are maintained at pre-collusive levels, then the firm with the lowest competitive price-cost margin has the strongest incentive to deviate from the collusive agreement. The lowest-quality supplier has the tightest incentive constraint when the difference in unit production costs is sufficiently small.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cartel Stability, Collusion, Vertical Differentiation, Price Collusion.
• Subjects: D - Microeconomics > D2 - Production and Organizations; D - Microeconomics > D4 - Market Structure, Pricing, and Design; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance; L - Industrial Organization > L4 - Antitrust Issues and Policies

References

Ecchia, Giulio and Luca Lambertini (1997), Minimum Quality Standards and Collusion,îJournal of Industrial Economics, 45(1), 101-113;

Friedman, James W. (1991), Game Theory with Applications to Economics. Oxford University Press, Oxford;

Gabszewicz, Jean J. and Jacques-Francois Thisse (1979), Price Competition, Quality and Income Disparities. Journal of Economic Theory, 20(3), 340-359;

Hackner, Jonas (1994), Collusive pricing in markets for vertically differentiated products, International Journal of Industrial Organization, 12(2), 155-177;

Harrington, Joseph E. Jr. (2006), How do Cartels Operate?, Foundations and Trends in Microeconomics, 2(1), 1-105;

Marini, Marco A. (2018), Collusive Agreements in Vertically Differentiated Markets, in Handbook of Game Theory and Industrial Organization, Volume 2: Applications, L. C. Corchon and M. A. Marini (eds.), Edward Elgar, Chelthenam, UK, Northampton, MA, USA;

Mussa, Michael and Sherwin Rosen (1978), Monopoly and Product Quality,î Journal of Economic Theory, 18(2), 301-317;

Symeonidis, George (1999), Cartel stability in advertising-intensive and R&D-intensive industries,î Economics Letters, 62, 121-129;

Tirole, Jean (1988), The Theory of Industrial Organization,îMIT Press, Cambridge, Massachusetts;

Vives, X. (2000), Oligopoly Pricing. Old Ideas and New Tools. MIT Press, Cambridge, Massachusetts.