Vertical differentiation and Collusion: Cannibalization or Proliferation?
Jean J. Gabszewicz (CORE – Universté Catholique de Louvain); Marco A. Marini (Università La Sapienza); Ornella Tarola (Università La Sapienza)
D42, D43, L1, L12, L13, L41
Vertically Differentiated Markets, Cannibalization, Market Pruning, Price Collusion
Economic Theory and Applications
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 We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market.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.
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