Costly Collusion in Differentiated Industries

This paper demonstrates that, under a set of weak assumptions, increased product differentiation will make it more difficult to sustain collusion when it is costly either to coordinate or to maintain collusion. These results contrast with the previous theoretical literature, which shows that, in the absence of these costs, greater differentiation can help foster collusion under some common models of product differentiation, but is consistent with the empirical literature that suggests that collusion tends to occur most among homogeneous firms. Further, we show that costly monitoring can be compatible with fully cooperative outcomes.