Abstract
Rooted in the economics of industrial organization, the principle of differentiation ranks as one of the fundamental tenets of competitive strategy. However, while differentiation may be an intuitive means of averting vigorous price competition, casual observation reveals that firms often sell similar, if not perfectly identical, product features. This paper examines the effect of (possibly tacitly) collusive pricing on product location choices in a vertical differentiation framework: when firms are able to successfully collude on price, they minimally differentiate at the top of the vertical spectrum. While firms jointly earn first-best profits, overall welfare is unambiguously lower.
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