Collusive Incentives in Markets with Differentiated Products

Abstract

This paper proposes a generalized framework for the analysis of collusion in Bertrand oligopoly markets with possibly differentiated products and asymmetric cost structures. We first study how product differentiation interacts with the intensity of collusion (i.e., the cartel’s proximity to the industry profit frontier) among symmetric firms, determining both pricing in the deviation phase from the collusive path and the penal codes available to firms. We then clarify under what conditions collusion is sustained. The second part introduces the relation between product differentiation and cost asymmetry, focusing on the case of collusion at the profit frontier. Two alternative forms in the firms’ cost structure are proposed. Whether such a cost asymmetry ultimately facilitates, or hampers, or even excludes the possibility of collusion at different levels of product differentiation depends, first, on the form of cost asymmetry between firms (homogeneous vs. heterogeneous input) and, second, on the penal code used by firms as a function of the demand variation.

Keywords: Collusion, Optimal punishment, Product differentiation, Cost Asymmetry.

JEL Classification: L11, L13, L40, C72