THE EFFECTS OF PRODUCT DIFFERENTIATION ON COLLUSIVE PRICING

Using the spatial competition framework of Hotelling (1929), this paper explores the relationship between the degree of product differentiation and the ability of firms to collude with respect to price. We show that the minimum discount factor required to support the joint profit maximum as an equilibrium outcome monotonically increases as products become better substitutes. When the joint profit maximum cannot be supported, the optimal collusive price is shown to decline as products become more substitutable. These findings suggest that firms producing stronger substitutes tend to find it tougher to collude in terms of their product price. © 1991.