Costly collusion in differentiated industries

Abstract

This paper demonstrates that increased product differentiation will make it more difficult to sustain collusion when it is costly to coordinate or maintain collusion. This result holds for a wide range of models, including all those commonly used to model competition between differentiated products. This contrasts with the previous theoretical literature, which shows that, in the absence of these costs, greater differentiation can help foster collusion under some common models of product differentiation but is consistent with the empirical literature, which suggests that collusion tends to occur most among homogeneous firms.