Working paper

Stability of collusion and quality differentiation: a Nash bargaining approach

How do incentives to collude depend on how asymmetric firms are? For low levels of differentiation, an increase in quality difference makes collusion

Publishing date
15 June 2021

How do incentives to collude depend on how asymmetric firms are? In many markets, product quality is an important parameter that determines firms’ market strategies. We study collusion in a quality-differentiated duopoly and we adopt a Nash bargaining approach to compute the collusive equilibrium and assess its stability. We derive collusive and deviation strategies as continuous functions of quality asymmetry. We obtain novel and surprising results. Stability of collusion is associated with quality differentiation in a non-monotonic way. For low levels of differentiation, an increase in quality difference makes collusion less stable. The opposite holds for high levels of differentiation. Also, while low quality firms are more likely to leave the cartel for small quality differences, high quality firms determine cartel stability when the quality difference is sufficiently high. Our results have implications for empirical research, and antitrust enforcement.

Recommended citation:
Athanasopoulos, T., B. Dindaroglu and G. Petropoulos (2021) ‘Stability of collusion and quality differentiation: a Nash bargaining approach’, Working Paper 09/2021, Bruegel

About the authors

  • Georgios Petropoulos

    Georgios Petropoulos joined Bruegel as a visiting fellow in November 2015, and he has been a resident fellow since April 2016. Since March 2022, he has been a non-resident fellow. Since March 2019, he is a Marie Curie Skłodowska Research Fellow at MIT and Bruegel and post-doctoral fellow at the MIT Initiative on the Digital Economy. Georgios’ research focuses on the implications of digital technologies on innovation, competition policy and labour markets. He is currently studying how we should regulate digital platforms, what the relationship between big data and market competition is as well as how the adoption of robots and information technologies affect labour markets and firms’ market returns. He holds a bachelors degree in Physics, master’s degrees in mathematical economics and econometrics and a PhD degree in Economics. He has also studied Astrophysics at a Master's level.

  • Thanos Athanasopoulos

  • Burak Dindaroglu

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