PRODUCT DIFFERENTIATION AND PRICE COLLUSION

The paper analyzes the implications of price collusion (with or without monetary transfers) on the degree of horizontal product differentiation. We find that the principle of minimum differentiation holds (i.e., firms sell the same product) when there is no possibility of monetary transfers. On the contrary, we find that the presence of monetary transfers may induce some product differentiation. The reason is that when monetary transfers are possible, it is not essential per se to be well located in terms of relative market shares. The outcome is then shown to be driven by only two forces: (1) choosing a product closer to the competitor's improves the bargaining power, (2) choosing a product closer to the one maximizing the joint profit improves the global firm-efficiency.