CARTEL STABILITY AND PRODUCT DIFFERENTIATION

This paper employs a supergame-theoretic model of collusion to analyze the effects of different levels of product differentiation on cartel stability. In contrast to earlier work, the ability of the parties to reach an agreement is assumed. Here the focus is on how greater product homogeneity increases both the gain to cheating on a collusive agreement and the magnitude of the punishments that follow a defection. The total effect on the likelihood a cartel is stable is therefore unclear. Two particular differentiated products models are then used to demonstrate that, contrary to the conventional view, greater homogeneity can reduce cartel stability.