Collusion, Customization and Transparency

Abstract

We analyze the effect of customizing a product on the ability of firms to tacitly collude on prices when some consumers are not informed about price. Following Bar-Isaac et al. (2014), we allow firms to be located inside the circle in the Salop model (1979). Our analysis shows that the effect of product customization on the stability of collusion depends on the sensitivity of consumers’ utility to the degree of customization. We also obtain that collusion becomes harder to sustain when more consumers are informed about prices. From our welfare analysis, we conclude that the effects of customizing depend on the sensitivity of consumers’ utility to the degree of customization. Finally, we find that transparency has no effect on the equilibrium outcome under collusion. However, at the punishment stage, the effect of transparency is positive on the consumer surplus and negative on the producer surplus. Since these two effects cancel each other out, we obtain that having more informed consumers on prices does not affect welfare.