Stability of Collusion and Quality Differentiation: A Nash Bargaining Approach

21 Pages Posted: 6 Jan 2021

See all articles by Thanos Athanasopoulos

Thanos Athanasopoulos

De Montfort University - Department of Economics and Marketing

Burak Dindaroglu

Izmir Institute of Technology

Georgios Petropoulos

Massachusetts Institute of Technology (MIT); Stanford University

Date Written: November 11, 2020

Abstract

How do incentives to collude depend on how asymmetric firms are? In digital and technology markets product quality is an important parameter that determines firms' market strategies. We study collusion in a quality differentiated duopoly and we adopt a Nash bargaining approach to compute the collusive equilibrium and assess its stability. We derive collusive and deviation strategies as continuous functions of quality asymmetry. We obtain novel and surprising results. Stability of collusion is associated with quality differentiation in a non-monotonic way. For low levels of differentiation, an increase in quality difference makes collusion less stable. The opposite holds for high levels of differentiation. Also, while the low quality firm is more likely to leave the cartel for small quality differences, the high quality firm determines cartel stability when the quality difference is sufficiently high. Our results have implications for empirical research, strategy theory, and antitrust enforcement.

Keywords: Collusion, Vertical differentiation, Nash bargaining

JEL Classification: D43, L13, L40, K21

Suggested Citation

Athanasopoulos, Thanos and Dindaroglu, Burak and Petropoulos, Georgios, Stability of Collusion and Quality Differentiation: A Nash Bargaining Approach (November 11, 2020). Available at SSRN: https://ssrn.com/abstract=3728502 or http://dx.doi.org/10.2139/ssrn.3728502

Thanos Athanasopoulos

De Montfort University - Department of Economics and Marketing

Hugh Aston Bldg, The Gateway
Leicester, LE1 9BH
United Kingdom

Burak Dindaroglu

Izmir Institute of Technology ( email )

Gulbahce Kampusu
Urla/İzmir, 35430
Turkey

Georgios Petropoulos (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Stanford University ( email )

Stanford, CA 94305
United States

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