Tacit Collusion in a Spatial Model with Delivered Pricing

Abstract

This paper studies a spatial model with delivered pricing to examine the relationship between the location of ®rms and their incentives to collude. Since location is an easily observable variable, this information could be of potential use to antitrust regulators. We ®nd that, given demand, a smaller ®rm dispersion is more likely to sustain tacit collusion. That is, the critical discount factor needed to sustain collusion, monotonically decreases as ®rms are located closer together. We also show that as demand increases, it is easier to sustain tacit collusion, given ®rm locations. The above results are in contrast to existing results regarding mill pricing in the context of product differentiation models.

Collusion in Spatially Separated Markets with Quantity Competition

“…Gupta and Venkatu (2001) show that in their model a smaller firm dispersion is more likely to sustain the collusive agreement.…”

“…7 Superscript "D" is used to indicate the deviation profit. 8 Due to symmetry it does not matter which firm deviates, therefore we use firm A. 9 The present value of a monetary unit received every period in the future beginning with the second period equals δ 1−δ .…”

“…1 However, Gupta and Venkatu argue that "Typically when transport cost is large relative to total production cost, for example as in the ready-mix cement industry, spatial discriminatory (or delivered) pricing is more appropriate than mill pricing" (Gupta and Venkatu (2001), p. 52).…”

Government-leading welfare-improving collusion

“…Many works adopt this strategy when analyzing stability of agreements. See, among others, Deneckere (1983), Gibbons (1992), Maggi (1999), Gupta and Venkatu (2002), and Matsumura and Matsushima (2005).…”

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

“…Not surprisingly, in a huge number of antitrust cases, the proximity (in terms of space or in terms of product differentiation) between firms has been used in the evaluation of the anticompetitive behaviour of the firms. 1 In the economic literature discussing the relationship between firms' distance and collusion sustainability, one may find: a positive monotonic relationship (Chang 1991(Chang , 1992Hackner 1995;Miklòs-Thal 2008); a negative monotonic relationship (Friedman and Thisse 1993;Gupta and Venkatu 2002;Colombo 2010); a non-monotonic relationship (Ross 1992;Deneckere 1983); no relationship (Colombo 2010); ambiguity of the relationship (Matsumura and Matsushima 2005;Andaluz 2010). Going into details, a first stream of literature has analysed the relationship between firms' location and collusion sustainability when firms are supposed to set a uniform price to all consumers.…”