On the sustainability of collusion in a differentiated oligopoly with a cartel and a fringe

Abstract

We discuss the effects of the existence of non-colluding (fringe) firms on cartel sustainability. We obtain, using trigger strategies, that with product differentiation collusion is always more easily sustained when firms compete in prices than when firms compete in quantities. This is true basically because (i) price competition is more intense than quantity competition, and (ii) fringe firms exacerbate the fact that cartel firms have more incentives to deviate from the agreement under quantity competition. This result reverses previous findings where, in the absence of fringe firms, product differentiation plays a crucial role in determining the effectiveness of price or quantity competition in sustaining collusion. © 2014 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd.