Hotelling Model & Collusion Analysis
Uploaded by
Шерхан АлишерHotelling Model & Collusion Analysis
Uploaded by
Шерхан АлишерCommon questions
Powered by AIDelayed detection of deviations increases the critical discount factor because firms benefit from their deviation for longer before being punished. In the three-firm Cournot model, if detection takes two periods, the deviating firm enjoys higher profits without immediate repercussions, necessitating a higher valuation of future profits (higher discount factor) for collusion to be appealing relative to the benefits of deviation . This delay undermines the immediacy of punitive measures, complicating collusion sustainability .
The critical discount factor increases with the probability of entry (φ) because frequent entry makes it harder to sustain collusion. Newcomers who enter and offer their products at the marginal cost disrupt existing collusive prices, shortening the time collusive profits can be sustained before undercutting occurs . The increased probability of such disturbance demands a higher valuation of future profits (higher discount factor) for current collusion to be rational .
If one masseur, Carlo, experiences an increase in marginal cost from cC=20 to cC=30 while Gianni's marginal cost remains at 20, Carlo will have to increase his prices to maintain profitability. This price increase makes Gianni's offer more attractive to consumers, increasing his demand . Carlo would face lower demand due to higher prices, reducing his market share. The increased marginal cost directly decreases Carlo's profits due to higher production costs .
Collusion is more likely sustainable in Market A, where firms have equal capacity, than in Market B, where there is unequal capacity distribution. Equal capacity promotes symmetry in market power, making mutual adherence to collusive agreements easier to achieve and maintain . In contrast, in Market B, a firm with significant capacity might find it personally advantageous to deviate for larger short-term gains, making sustainable collusion more challenging due to asymmetry in incentives .
The critical discount factor for sustaining collusion is higher when market interactions occur less frequently, as firms value future collusive profits less when they occur over longer intervals . Less frequent interactions increase the time until profits from collusion are realized, requiring firms to place more emphasis on future benefits (higher discount factor) to find collusion worthwhile .
Non-publicized price practices, such as oil companies not advertising prices, reduce market transparency and facilitate tacit collusion by obscuring the competitive landscape. This opacity prevents consumers from effectively comparing prices, limiting competitive pressure on firms to lower prices, thereby sustaining higher-than-competitive prices . The lack of transparency can undermine competitive dynamics and result in anti-competitive effects, allowing firms to maintain greater market power .
Collusion is generally more sustainable in a Cournot competition model than in Bertrand. In Cournot competition, firms compete on quantities, and price adjustments react less drastically to changes in other firms' output, making collusion easier to coordinate and sustain . However, in Bertrand competition, firms compete directly on prices, which can rapidly lead to price wars if any firm deviates, making collusion more unstable and difficult to maintain .
When a regulatory authority sets constant prices, firms in a differentiated product market are incentivized to maximize non-price competition, such as by increasing spatial differentiation to capture distinct market segments . This strategic behavior allows firms to minimize direct competition on regulated prices, focusing instead on differentiation through location or quality enhancements to capture a unique customer base .
In markets with homogenous products, price competition is more direct, making it easier to sustain collusion as firms' pricing strategies are clear and deviations are quickly noticeable. However, in markets with differentiated products, firms have more strategic variables such as quality and location, making it harder to detect deviations and sustain implicit collusion . Differentiation increases complexity in maintaining coordinated strategic alignment .
In the Hotelling model with vertical differentiation where firms are located at l1=0 and l2=1, the firm with higher quality (s1 > s2) will set a higher price because consumers are willing to pay more for higher quality . The firm with higher quality also captures a larger market share since its product is perceived as more valuable . As the quality difference (s1-s2) increases, the firm with higher quality can increase its price further and will capture an even larger portion of the market .