Collusion in quality‐segmented markets

This paper analyzes price collusion in a repeated game with two submarkets: a standard and a premium quality segment. Within this setting, we study four types of price‐fixing agreement: (i) a segment‐wide cartel in the premium submarket only, (ii) a segment‐ wide cartel in the standard submarket only, (iii) two segment‐wide cartels, and (iv) an industry‐wide cartel. We present a complete characterization of the collusive pricing equilibrium and examine the corresponding effect on market shares and welfare. Partial cartels operating in a sufficiently large segment lose market share and the industry‐wide cartel prefers to maintain market shares at precollusive levels. The impact on consumer and social welfare critically depends on the cost of producing quality. Moreover, given that there is a cartel, more collusion can be beneficial for society as a whole.