FEEM working papers "Note di lavoro" series
2020 .20

Collusion in Quality-Segmented Markets


Authors: Iwan Bos, Marco A. Marini
Series: 2030 Agenda
Editor: Sergio Vergalli
Keywords: Partial Cartels, Price Collusion, Market Segmentation, Vertical Differentiation
JEL n.: D4, L1

Abstract

This paper analyzes price collusion in a repeated game with two submarkets; a standard and a premium quality segment. Within this setting, we study four types of price-fixing agreement: (i) a segment-wide cartel in the premium submarket only, (ii) a segment-wide cartel in the standard submarket only, (iii) two segment-wide cartels, and (iv) an industry-wide cartel. We present a complete characterization of the collusive pricing equilibrium and examine the corresponding effect on market shares and welfare. Partial cartels operating in a sufficiently large segment lose market share and the industry-wide cartel prefers to maintain market shares at pre-collusive levels. The impact on consumer and social welfare critically depends on the cost of producing quality. Moreover, given that there is a cartel, more collusion can be beneficial for society as a whole.

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Suggested citation: Bos, I., M. A. Marini, (2020), 'Collusion in Quality-Segmented Markets', Nota di Lavoro 20.2020, Milano, Italy: Fondazione Eni Enrico Mattei

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