Intertemporal Product Choice and Its Effects on Collusive Firm Behavior.

This study analyzes the collusive behavior of firms in markets characterized by horizontal product differentiation. The special features are that product choice is endogenized and that firms may redesign their products intertemporally at a fixed cost. The main objective is to examine the relationships between the extent of product differentiation, the product redesigning cost, and the degree of collusion supportable. The findings indicate that flexible product design makes collusion more difficult to sustain since, in the event collusion breaks down, firms have an incentive to mitigate the severity of punishment by redesigning their products and, thus, reducing price competition. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.