Collusion in two models of spatial competition with quantity-setting firms

Abstract

We use the linear city model and the circular city model to investigate the relationship between collusion sustainability and firms' distance, and between collusion sustainability and transportation costs when firms can sell different quantities at each location. We find that when transportation costs are low, collusion sustainability monotonically increases with firms' distance, while when transportation costs are high, the relationship is non-monotonic. Higher transportation costs increase collusion sustainability. Finally, in the circular city model, welfare is higher under collusion than under competition when transportation costs are high and firms are distant enough. JEL Classification

Collusion in Spatially Separated Markets with Quantity Competition

“…However, Colombo (2010) shows that in a linear city model with quantity setting firms social welfare is always lower with collusion. This is an interesting result, since we as- 12 However, the second solution equals t = a 2 , the upper bound of transportation costs.…”

“…sume symmetric, but concentrated, demand and find a possibly higher social welfare. In a circular city Colombo (2010) is able to show higher welfare when transportation costs are high and firms are distant enough.…”

“…If quantity is less flexible than the price of the good, then using competition in quantities is more adequate. Colombo (2010) analyzes collusion with quantity setting firms that spatially discriminate in two different models: in a linear and in a circular city model. He shows that higher transportation costs increase collusion sustainability.…”

Predation in Space

“…As clarified by several regional science contributions, 4 transportation costs are substantially different from production costs. Moreover, the fact that firms are located in different points in space determines market segmentation, thus allowing the possibility of spatial discrimination (Hamilton et al, 1989;Anderson & Neven, 1991;Colombo, 2012). Therefore, the implications of a spatial distribution of firms and consumers on the predatory mechanisms by an incumbent are not a priori obvious, and require a specific analysis.…”

A Spatial Model of Cartel Stability: The Influence of Production Cost Convexity

“…Our study differs from those who study collusion in Hotelling type models that assume a mill price (Chang, and Hackner, ). It also differs from those that model the influence of location but assume a game in quantity rather than a game in price (Colombo, ). It builds most closely from Gupta and Venkatu () who examine a similar model of duopolists engaged in spatial price discrimination but with constant unit production costs.…”