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The Effects of Cartelization on Product Design

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  • Haan, Marco A.
  • Toolsema, Linda A.

    (Groningen University)

Abstract

We consider the following model. First, two firms choose locations on a Hotelling line. Second, they play a repeated price-setting game, in which they may be able to collude. Transportation costs are quadratic. We show that if firms collude in the location stage, they choose locations that coincide with the social optimum, provided that the discount factor is high enough. If the discount factor is lower, the firms locate further apart. Furthermore, we show that if firms choose locations non-cooperatively, they both locate in the middle of the line, again provided that the discount factor is high enough. If the discount factor is lower, the firms locate further apart. Thus, with the possibility of a price cartel and a discount rate that is sufficiently high, Hotelling?s principle of minimum differentiation is restored.

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File URL: http://irs.ub.rug.nl/ppn/277137497
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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 05F02.

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Date of creation: 2005
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Handle: RePEc:dgr:rugsom:05f02

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  1. Hackner, Jonas, 1995. "Endogenous product design in an infinitely repeated game," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 277-299.
  2. Kali P. Rath, 1998. "Stationary and nonstationary strategies in Hotelling's model of spatial competition with repeated pricing decisions," International Journal of Game Theory, Springer, vol. 27(4), pages 525-537.
  3. Chang, Myong-Hun, 1991. "The effects of product differentiation on collusive pricing," International Journal of Industrial Organization, Elsevier, vol. 9(3), pages 453-469, September.
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Cited by:
  1. Miklós-Thal, Jeanine, 2008. "Delivered pricing and the impact of spatial differentiation on cartel stability," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1365-1380, November.

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