Abstract
We model the non-cooperative choice between quantity and price in order to stabilize collusion with horizontally differentiated goods, through two meta-games where each firm alternatively considers its payoff in the market supergame as directly related to its own or the rival’s ability to collude. In the first setting, firms collude in prices irrespective of the degree of differentiation, so that initially a Prisoners’ Dilemma is observed, while for very close substitutes the outcome is Pareto-efficient. In the second setting, the Nash equilibrium is unique and Pareto-efficient for the most part of the substitutability range, while two asymmetric equilibria obtain when products are very close substitutes.
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The first version of this paper was written while both authors were at the Institute of Economics, University of Copenhagen. The views expressed in this article do not necessarily reflect those of the European Commission. We thank three anonymous referees and the audience at a seminar in Copenhagen for useful comments. The usual disclaimer applies.
Received: March 2003/Accepted: September 2003