Spatial pricing and collusion

Abstract

Economists frequently express concern that antitrust policy mistakes the Bertrand competition of spatial price discrimination for collusion (McChesney & Shughart, 2007). Higher price markups closer to a firm's location result not because of collusion but because the delivered cost constraints of rivals are less binding. Thus, the critical question for antitrust authorities should be whether price discrimination facilitates or impedes collusion. Helfrich and Herweg (2016) argue that price discrimination in general may be helpful. When firms discriminate, collusion on price becomes less likely as the discount factor needed to ensure stability becomes higher. In a very specific comparison of spatial price discrimination and uniform pricing, show that this benefit of discrimination carries over to spatial markets when underlying transport costs are relatively high.