FEEM working papers "Note di lavoro" series
2016 .015

Vertical Differentiation and Collusion: Cannibalization or Proliferation?


Authors: Jean J. Gabszewicz, Marco A. Marini, Ornella Tarola
Series: Economic Theory
Editor: Carlo Carraro
Keywords: Vertically Differentiated Markets, Cannibalization, Market Pruning, Price Collusion
JEL n.: D42, D43, L1, L12, L13, L41

Abstract

In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multiproduct  firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market. The same findings do not hold when firms are horizontally differentiated along a circle.

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Suggested citation: Gabszewicz, J. J., M. A. Marini, O. Tarola, (2016), 'Vertical Differentiation and Collusion: Cannibalization or Proliferation?',  Nota di Lavoro  15.2016, Milan, Italy: Fondazione Eni Enrico Mattei

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