Collusion stability in a differentiated Cournot duopoly with payoff interdependence

This study considers an infinitely repeated Cournot (quantity-setting) duopoly with product differentiation in which each firm is concerned about not only its own profit but also that of the opponent. Assuming that both firms use the grim trigger strategy, we prove that tacit collusion between the firms (cartel) may become more sustainable as product substitutability increases when the objective of each firm is to maximize its own profit compared to that of the opponent. On the other hand, it is shown that when each firm seeks to maximize its own “absolute†profit without taking the profit of the opponent into account, increased product substitutability necessarily destabilizes collusion between the firms. These results imply that the impact of increasing product substitutability on collusion stability crucially hinges on whether duopoly firms seek to maximize absolute or relative profits.