Collusion, Customization and Transparency

We analyze the e¿ect of customizing a product on the ability of firms to tacitly collude on prices when some consumers are not informed about price. Following Bar-Isaac et al. (2014), we allow firms to be located inside the circle in the Salop model (1979). Our analysis shows that the e¿ect of product customization on the stability of collusion depends on the sensitivity of consumers’ utility to the degree of customization. We also obtain that collusion becomes harder to sustain when more consumers are informed about prices. From our welfare analysis, we conclude that the e¿ects of customizing depend on the sensitivity of consumers’ utility to the degree of customization. Finally, we find that transparency has no e¿ect on the equilibrium outcome under collusion. However, at the punishment stage, the e¿ect of transparency is positive on the consumer surplus and negative on the producer surplus. Since these two e¿ects cancel each other out, we obtain that having more informed consumers on prices does not a¿ect welfare.