Delivered Pricing and the Effect of Horizontal Differentiation on Optimal Collusion

This paper analyzes the impact of horizontal differentiation on the sustainability of collusionwhen firms charge delivered prices. Gupta and Venkatu (2002) show that differentiationhinders collusion if firms employ standard grim trigger punishments. The reason is thatcompetitive profits are higher the higher the degree of differentiation, which weakensdeterrence. We show that the results change dramatically if collusion is sustained by optimalpunishments instead, since these yield minmax profits irrespectively of the degree ofdifferentiation.A high degree of differentiation then tends to facilitate collusion by rendering deviations lessprofitable. Excessive differentiation sometimes hinders collusion, however, because it alsoimplies high transportation costs for a successful cartel.