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Product differentiation, uncertainty and the stability of collusion

By Michael A. Raith

Abstract

The conventional view that product heterogeneity limits the scope for collusion among oligolpolists has been challenged in recent theoretical work. This paper provides an argument in support of the conventional view by emphasising the role of uncertainty. I introduce the idea that, with stochastic demand, an increase in the heterogeneity of products also leads to a decrease in the correlation of the firms? demand shocks. With imperfect monitoring, this makes collusion more difficult to sustain, as discriminating between random demand shocks and marginal deviations from the cartel strategy becomes more difficult. These effects are illustrated within a Hotelling-type duopoly model

Topics: HF Commerce
Publisher: Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science
Year: 1996
OAI identifier: oai:eprints.lse.ac.uk:6770
Provided by: LSE Research Online

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Citations

  1. Email: mraith@ulb.ac.be © by Michael Raith. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
  2. (1996). paper originates from chapter 4 of my Ph.D. thesis at the London School of Economics (Raith
  3. (1996). The Toyota Centre Suntory and Toyota International Centres for Economics and Related Disciplines London doi

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