Product Differentiation, Market Transparency And Collusive Behavior

The objective of this dissertation is to analyze the relationshipbetween product differentiation, market transparency and collusivebehavior.Tacit collusion is a kind of Cooperative Strategic Behavior.Collusion can take many forms. It can be explicit, tacit, or anycombination of the two. However, since explicit collusion is usuallybanned by antitrust law, we will focus here on the possibility of tacitcollusion. Tacit collusion can arise when firms interact repeatedly. Inoligopolistic industries, firms tend to be interdependent in theirpricing and output decisions so that the actions of each firm impacton and result in a counter response by the other firm(s). In suchcircumstances, oligopolistic firms may take their rivals' actions intoaccount and coordinate their actions as if they were a cartel withoutan explicit or overt agreement. Such coordinated behavior is oftenreferred to as tacit collusion.Collusion theory is the key of new industry organization theory,although many studies had made great progress in the mechanismof collusion, but there are many questions unsolved, such as theeffects of the characteristics of the industry on stability of collusion isambiguous. We try to do something to make it clear. Moreover, in thetheory of price war in China, many studies explain the cause of pricewar in China from the property right, industry structure and industrycapacity. We think that the product differentiation is one of majorfactor.The models of such relationships are of interest to strategyresearchers, trade association and antitrust authorities.This dissertation consists of eight chapters and four parts. Thefirst part consists of the introduction and the first chapter, which is thefoundation. The second part is from the second chapter to fifthchapter, which is the theory of collusion. The third part is theempirical study. The last part is the eighth chapter, which sums upthe dissertation, and points out the limitation and the next to do.The first chapter is the foundation of next chapters. It concludesthe definition of collusion, mechanism, collusion and price war,facilitating practice, empirical study of collusion and public policy tocollusion. The most importance is the repeated game theory.The second chapter models a duopoly market in a verticaldifferentiated products industry following Mussa-Rosen(1978) wherefirms produce only one variety and production involves variable costsconvex in quality and an exogenous fixed cost. We prove that it ismore difficult for firms to collude in prices, if consumers aresufficiently rich, since, as income increase, products become closersubstitutes.The third chapter examines the incentives to differentiateproducts horizontally in a repeated game. The spatial competitionmodel of Hotelling is extended to represent a horizontallydifferentiated products market in a supergame setting. The first stepis to investigate the relationship between the degree of productdifferentiation and the ability of firms to collude. In achieving this end,we focus our attention on the price game while treating the productlocations as fixed. Our findings suggest that collusion is more difficultto sustain the smaller the degree of product differentiation. In step 2,we allow firms to make location choices in the beginning of the game(stage 1) followed by the infinite horizon price game (stage 2). In thissetting, we find that firms with a high valuation of future profitsdifferentiate their products only moderately so as to capture localmonopoly power in each segmented market. This result hassignificant welfare implications in that the collusive duopoly mayprovide a socially optimal product variety by reducing the need toexcessively differentiate.The fourth chapter investigates the effects on tacit collusion ofincreased market transparency on the consumer side. Increasingmarket transparency on the consumer side increases the benefits toa firm from undercutting the collusive price. It also decreases thepunishment profit. The net effect is that collusion becomes harder tosustain.The fifth chapter continues to investigate the effects on tacitcollusion of increased market transparency on the producer side andtrade off the two effects. Increasing market transparency on theproducer side facilitates collusion. When transparency is increasedon both sides, the net effect is that collusion becomes harder tosustain.The empirical studies of the sixth and seventh chapters test themajor outcome of the theory by using data on China automobileindustry in 2004 and the real estate in China. We found that productdifferentiation is one of the significant factors resulting in car pricewar in 2004. And the characteristic space for each model of carshrank significantly and enhanced competition in the market. Wealso found the product differentiation and market transparency is oneof the major factors resulting in high price of the real estate.