Vertical Differentiation and Collusion: Cannibalization or Proliferation?

22 Pages Posted: 8 Mar 2016

See all articles by Jean J. Gabszewicz

Jean J. Gabszewicz

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Marco A. Marini

Marco A. Marini; University of Rome La Sapienza

Ornella Tarola

University of Lugano - Institute of Economic Research

Date Written: March 8, 2016

Abstract

In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multiproduct firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market. The same findings do not hold when firms are horizontally differentiated along a circle.

Keywords: Vertically Differentiated Markets, Cannibalization, Market Pruning, Price Collusion

JEL Classification: D42, D43, L1, L12, L13, L41

Suggested Citation

Gabszewicz, Jean J. and Marini, Marco A. and Tarola, Ornella, Vertical Differentiation and Collusion: Cannibalization or Proliferation? (March 8, 2016). FEEM Working Paper No. 015.2016, Available at SSRN: https://ssrn.com/abstract=2744525 or http://dx.doi.org/10.2139/ssrn.2744525

Jean J. Gabszewicz

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Marco A. Marini (Contact Author)

Marco A. Marini ( email )

Piazzale Aldo Moro, 5
Roma, 00185
Italy

HOME PAGE: http://sites.google.com/a/uniroma1.it/marcomarini/

University of Rome La Sapienza ( email )

29
Roma, 00185
Italy
+39 06 49910843 (Phone)

HOME PAGE: http://sites.google.com/a/uniroma1.it/marcomarini

Ornella Tarola

University of Lugano - Institute of Economic Research ( email )

CH-6900 Lugano
Switzerland
+41919124661 (Phone)
+41919124662 (Fax)

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