Profitable collusion on costs: a spatial model
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Profitable collusion on costs: a spatial model John S. Heywood1
•
Zheng Wang2
Received: 2 January 2020 / Accepted: 3 July 2020 Ó Springer-Verlag GmbH Austria, part of Springer Nature 2020
Abstract This paper uniquely demonstrates the scope for profitable collusion on transport costs under delivered pricing. In addition to being profitable, such collusion is shown to be more stable than price collusion and harder to detect as it presents to authorities as continued Bertrand price competition. Such collusion generates endogenous duopoly locations outside the quartiles with less stable but more profitable collusion happening toward the endpoints. These results emerge in both the traditional model of inelastic demand and an extended model of elastic demand. Keywords Spatial price discrimination Collusion Transport costs
JEL Classification L13 L41 R32
1 Introduction Spatial price discrimination is common in practice and often misunderstood. The unique combination of location based pricing and endogenous location choices makes it difficult for authorities to determine when firms are engaging in Bertrand competition or in collusion (McChesney and Shugart 2007). Thus, as Gupta and Venkatu (2002, p. 50) make clear, any systematic link between the incentive to collude and locations would be highly useful to antitrust authorities. Earlier studies of spatial price discrimination uniformly assume collusion on the final price (Gupta and Venkatu 2002; Matsumura and Matsushima 2005; Miklo´sThal 2008; Colombo 2013; Andree et al. 2018). We differ by recognizing that profit under spatial price discrimination increases with a rival’s transport cost. Thus, & Zheng Wang [email protected] 1
University of Wisconsin – Milwaukee, Milwaukee, USA
2
International School of Economics and Management, Capital University of Economics and Business, Beijing 100070, China
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J. S. Heywood, Z. Wang
collusion to increase transport costs (while still engaging in Bertrand price competition) can be profitable. Importantly, cost collusion is more stable than price collusion and so may be more likely to occur. In addition, it may be even harder to detect by authorities than price collusion also making it more likely. The notion of endogenous transport costs has precedents. Von Ungern–Sternberg (1988) argues that transport cost should be an endogenous strategic variable. Transport costs represent the scale of product diversity and minimization may not be optimal. Hendel and Neiva-de-Figueiredo (1997) pursue this point by endogenizing transportation costs which capture the ‘‘degree of focus’’. They show that when production cost is dependent on transport cost, more firms will enter the market. Heywood and Wang (2015) study a transport cost innovation showing that the distribution of observed transport costs depends endogenously on both the optimal R&D investment and the optimal licensing strategy by innovators. Colluding on costs (in our case transportation costs) also has precedents. Dekel and Sc
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