Vertical Differentiation and Collusion: Cannibalization or Proliferation?
22 Pages Posted: 8 Mar 2016
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 We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market.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
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