Alliance Formation in a Vertically Differentiated Market

Jean Gabszewicz, Marco Marini and Ornella Tarola

No 2015030, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper studies how the possibility for firms to sign collusive agreements (as for instance being part of alliances, cartels and mergers) may affect their quality and price choice in a market with vertically differentiated goods. For this purpose we model the firm decisions as a three-stage game in which, at the first stage, firms can form an alliance via a sequential game of coalition formation and, at the second and third stage, they decide simultaneously their product qualities and prices, respectively. In such a setting we study whether there exist circumstances under which either full or partial collusion can be sustained as a subgame perfect Nash equilibrium of the coalition formation game. Also, we analyse the effects of different coalition structures on equilibrium qualities, prices and profits accruing to firms. It is shown that only intermediate coalition structures arise at the equilibrium, with the bottom quality firm always included. Moreover, all equilibrium price and quality configurations always coincide with that observed in the duopoly case, with only two quality variants on sale.

Keywords: Vertically differentiated market; endogenous alliance formation; coalition structures; price collusion; grand coalition; coalition stability; sequential games of coalition formation (search for similar items in EconPapers)
JEL-codes: D42 D43 L1 L12 L13 L41 (search for similar items in EconPapers)
Date: 2015-04-01
New Economics Papers: this item is included in nep-bec, nep-cdm, nep-com, nep-gth, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Alliance Formation in a Vertically Differentiated Market (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2015030

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