Customer-side transparency, elastic demand, and tacit collusion under differentiation

Abstract

Customer-side price transparency affects sustainability of collusion in a duopoly model of spatial product differentiation with elastic demand. When product differentiation is significant, more transparency facilitates collusion as measured by the critical discount factor. For the case where products are relatively homogeneous, the relationship is U-shaped. The level of transparency that optimally deters collusion is thus zero for intermediate to large degrees of product differentiation. Only when products are very moderately differentiated will full transparency be beneficial.