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Quality Selection and Cartel Stability

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  • Thibault Larger

    (LEEA - ENAC - Laboratoire d'Economie et d'Econométrie de l'Aérien - ENAC - Ecole Nationale de l'Aviation Civile)

Abstract

This paper studies a model of vertical differentiation and examines the relationship between the quality choice of firms and their incentives to collude. We focus on the case where the heterogeneity in consumers' income is mild (when problems of differentiation are not regular), and where differentiated goods cannot be marketed under competition. Given that heterogeneity is weak, the firms can seek for a collusive agreement in order to engage in discrimination and exploit income heterogeneity. The sustainability of such agreement only depends on the incentive constraint of the firm providing low quality. The paper shows that both the extent of differentiation and cartel stability positively depend on income heterogeneity, which contradicts common wisdom. The result relies on two features : punishments are optimal and the rent from differentiation is limited. The paper also advocates for great caution when designing screens aiming at detecting cartels.

Suggested Citation

  • Thibault Larger, 2010. "Quality Selection and Cartel Stability," Post-Print hal-01025644, HAL.
    • Handle: RePEc:hal:journl:hal-01025644
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