The Effects of Cartelization on Product Design

Marco A. Haan and Linda A. Toolsema
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Linda A. Toolsema: Groningen University

No 05F02, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

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.

Date: 2005
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