Product differentiation, uncertainty and price coordination in oligopoly
This thesis consists of three self-contained analyses of models with price-setting firms. It explores the relationships between different sources of market imperfection that may be present simultaneously: product differentiation, imperfect information and collusive pricing. Chapter 2 analyses the circumstances under which oligopolists have an incentive to exchange private information on unknown demand or cost parameters. It presents general model which encompasses virtually all models in the current literature on information sharing as special cases. Within this unifying framework it is shown that in contrast to the apparent inconclusiveness of previous results, some simple principles determining the incentives for firms to share information can be obtained. Existing results are generalised, some previous interpretations questioned and new explanations offered. Chapter 3 addresses the question of how price setting between firms in a spatial retail market is affected if the relevant consumers commute between their home and their workplace and try to combine shopping with commuting. It is shown within a specific model that for small commuting distances, an increase in commuting leads to a decrease of equilibrium prices, since due to a reduction of effective travel costs the firms' products become better substitutes. Under quite general conditions, however, larger or dispersed commuting distances lead to the nonexistence of a price equilibrium. Chapter 4 analyses the question how product differentiation affects the scope for oligopolists to collude on prices. It suggests a precise theoretical foundation for the conventional view that heterogeneity is a factor hindering collusion, a view which has been challenged in recent theoretical work. It is argued that, in a world of uncertainty, an increase in the heterogeneity of products leads to a decrease in the correlation of the firms' demand shocks. With imperfect monitoring, this makes collusion more difficult to sustain, as discriminating between random demand shocks and deviations from the cartel strategy becomes more difficult.