Product market segmentation and output collusion within substitute products

Abstract

We extend the differentiated product model, first developed by Bowley (1924), by relaxing the assumption that each firm produces only one differentiated product. By doing so, we are able to analyze the potential for collusive market segmentation in a two-stage decision framework, first in product space and second in output. We find that when firms cannot coordinate on output, the required discount factor that supports collusive market segmentation is strictly decreasing in product substitutability and is greater than partial output and full collusion. Overall we find that output collusion alone is easier to sustain than collusive product market segmentation.