Cartel Formation with Quality Differentiation

Bos, Iwan and Marini, Marco A. and Saulle, Riccardo (2019): Cartel Formation with Quality Differentiation.

Abstract

Research on collusion in vertically differentiated markets is conducted under one or two potentially restrictive assumptions. Either there is a single industry-wide cartel or costs are assumed to be independent of quality or quantity. We explore the extent to which these assumptions are indeed restrictive by relaxing both. For a wide range of coalition structures, profit-maximizing cartels of any size price most of their lower quality products out of the market as long as production costs do not increase too much with quality. If these costs rise sufficiently, however, then market share is maintained for all product variants. All cartel sizes may emerge in equilibrium when exclusively considering individual deviations, but the industry-wide cartel is the only one immune to deviations by coalitions of members. Overall, our findings suggest that firms have a strong incentive to coordinate prices when the products involved are vertically differentiated.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cartel Formation, Collusion, Vertical Differentiation, Endogenous Coalition Formation, Industry-wide Cartel, Partial Cartels.
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C71 - Cooperative Games; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; D - Microeconomics > D0 - General; D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles; D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and Impact; D - Microeconomics > D0 - General > D04 - Microeconomic Policy: Formulation, Implementation, and Evaluation; D - Microeconomics > D4 - Market Structure, Pricing, and Design; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection

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