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Product Differentiation and Collusion Sustainability When Collusion Is Costly

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  • Stefano Colombo

    (Università Cattolica del Sacro Cuore, I-20123 Milan, Italy)

Abstract

A widely debated question in recent years by both strategy theorists and antitrust practitioners is what role product differentiation between firms plays in their ability to sustain a collusive agreement in order to reduce the strength of competition and gain higher profits. This paper addresses the following question: What happens to the “product differentiation--collusion sustainability” relationship when setting up and maintaining an agreement is costly? We show that introducing collusion costs into the discussion has relevant implications. Indeed, sufficiently high collusion costs modify the underlying market structure, thus altering the product differentiation--collusion sustainability relationship with respect to the case where collusion costs are absent or low. In particular, if the gains from collusion are increasing (decreasing) with the degree of product differentiation, the relationship between product differentiation and collusion sustainability is always positive (negative), whereas if the gains from collusion are inverted U-shaped, the relationship is inverted U-shaped too. These results stress the importance of considering those markets where the coordination between firms is sufficiently costly as structurally different from those markets where coordination has no costs for firms.

Suggested Citation

  • Stefano Colombo, 2013. "Product Differentiation and Collusion Sustainability When Collusion Is Costly," Marketing Science, INFORMS, vol. 32(4), pages 669-674, July.
  • Handle: RePEc:inm:ormksc:v:32:y:2013:i:4:p:669-674
    DOI: 10.1287/mksc.1120.0750
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    References listed on IDEAS

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    Cited by:

    1. Martin, Simon & Rasch, Alexander, 2024. "Demand forecasting, signal precision, and collusion with hidden actions," International Journal of Industrial Organization, Elsevier, vol. 92(C).
    2. Piccolo, Salvatore & Pignataro, Aldo, 2018. "Consumer loss aversion, product experimentation and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 49-77.
    3. Andrew Smyth, 2017. "How Product Innovation Can Affect Price Collusion," Working Papers 17-26, Chapman University, Economic Science Institute.
    4. Bian, Junsong & Zhao, Xuan & Liu, Yunchuan, 2020. "Single vs. cross distribution channels with manufacturers’ dynamic tacit collusion," International Journal of Production Economics, Elsevier, vol. 220(C).
    5. Yang, Jinrui, 2016. "Monopoly VS Competition: Market Structure’s Impact on Product Innovation-with Endogenous Quality of New Product," MPRA Paper 70094, University Library of Munich, Germany.
    6. Stefano Colombo, 2016. "Mixed oligopolies and collusion," Journal of Economics, Springer, vol. 118(2), pages 167-184, June.
    7. Matteo Bassi & Marco Pagnozzi & Salvatore Piccolo, 2015. "Product Differentiation by Competing Vertical Hierarchies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 904-933, October.
    8. Wu, Jiang & Zou, Liuxin & Gong, Yeming & Chen, Mingyang, 2021. "The anti-collusion dilemma: Information sharing of the supply chain under buyback contracts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 152(C).
    9. John S. Heywood & Zheng Wang, 2020. "Profitable collusion on costs: a spatial model," Journal of Economics, Springer, vol. 131(3), pages 267-286, December.
    10. Stefano Colombo & Aldo Pignataro, 2022. "Information accuracy and collusion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(3), pages 638-656, August.
    11. Lin, Jing & Ma, Xin & Talluri, Srinivas & Yang, Cheng-Hu, 2021. "Retail channel management decisions under collusion," European Journal of Operational Research, Elsevier, vol. 294(2), pages 700-710.
    12. Bian, Junsong & Lai, Kin Keung & Hua, Zhongsheng & Zhao, Xuan & Zhou, Guanghui, 2018. "Bertrand vs. Cournot competition in distribution channels with upstream collusion," International Journal of Production Economics, Elsevier, vol. 204(C), pages 278-289.
    13. Xiaona Zheng & Luping Sun & Andy A. Tsay, 2018. "Distribution Channel Strategies and Retailer Collusion in a Supply Chain with Multiple Retailers," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 35(03), pages 1-27, June.
    14. Salvatore Piccolo & Aldo Pignataro, 2016. "Consumer Loss Aversion, Product Experimentation and Implicit Collusion," CSEF Working Papers 457, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    15. Wei, Yuansheng & Dong, Yuxuan, 2022. "Product distribution strategy in response to the platform retailer's marketplace introduction," European Journal of Operational Research, Elsevier, vol. 303(2), pages 986-996.

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