On the relationship between product substitutability and tacit collusion

Collusion sustainability with a capacity-constrained firm

“…As the cartel sustainability depends entirely by the incentives of the large firms, when γ increases collusion is more likely to occur, other things being equal, for intermediate capacity. This result, which echoes those of Ross (1992) and Tyagi (1999), bears some important implications for Antitrust Authorities as the incentives to collude become more similar across (asymmetric) firms. This is because the difference in the critical value factors between the small and the large firm decreases.…”

“…Economists and policy-makers tend to agree that symmetry between firms facilitates the sustainability of a tacit cartel (Bernheim and Whinston, 1990;Ivaldi et al, 2003). Despite this common wisdom, several papers analyze the relationship between cartel stability and asymmetries in costs (e.g., Miklos-Thal 2011, Rothschild 1999and Vasconcelos 2005, product differentiation (e.g., Bos and Marini 2019;Bos et al 2020;Chang 1991;Lambertini and Sasaki 1999;Ross 1992;Tyagi 1999) and the number of products (e.g., Khün 2004). While all these models identify the different incentives to cheat among firms and the difficulty in punishing deviating behaviors, results often differ depending on the cost structure, type of competition, and punishment strategies.…”

“…Specifically, in the latter case, as γ increases, the small firm exerts a competitive pressure during the punishment to the large firms which, in addition to the reduction in the deviation profits, more than compensates for the externality exerted under collusion. Using the terminology of Tyagi (1999), increased product substitutability leads to higher gains from collusion that more than compensate for the gain from deviation. As a result, the large firms have more incentives to form a cartel rather than competing aggressively with the small firm outside the cartel.…”

Measuring the Impact of Increased Product Substitution on Pricing and Capacity Decisions Under Linear Demand Models

“…The above parameterization of linear demand functions, in which b (or a function of b ) is defined as the measure of product substitutability, has been commonly used in the economics literature (Singh and Vives 1984, Roller and Tombak 1990, 1993, Tyagi 1999, Bernhofen 2001, Mukherjee 2005), but has rarely been used by the operations management community. Recent exceptions are the papers by Goyal and Netessine (2005, 2007) and Bish and Suwandechochai (2006).…”

Costly Collusion in Differentiated Industries

“…Deneckere (1983) obtains mixed results when he analyzes the ease of collusion under both Bertrand and Cournot competition using a special case of Dixit's (1979) model of product differentiation; he finds that collusion under Cournot competition is easier to sustain when the goods are more heterogeneous, but that the relationship between ease of collusion and product differentiation is not monotonic under Bertrand competition, with increased product differentiation making collusion harder up to a certain level of differentiation, but then making collusion easier for any further increase in differentiation. Finally, Tyagi (1999) shows that the shape of the demand curve determines whether collusion can be more easily sustained in homogeneous or heterogeneous markets under quantity competition.…”