The Influence of Product Quality Differentiation on Telecom Carriers' Collusion

2. Related Literature

Product differentiations include horizontal product differentiation and vertical product differentiation. The former indicates that the amount of resources required in the manufacturing process is the same, but the products are different in design, such as variety, color, style, etc., while the latter refers to differences in a series of products based on certain quality requirements, such as quality difference. Chang (1991) studies the relationship between the degree of horizontal product differentiation and the ability of firms to maintain collusion and finds that collusion is more likely to occur in firms with greatly differentiated products. Chang (1992) allows firms to redesign products over time and believes that this hypothesis reinforces the results of his research (1991), that is, the more substitutable the product is, the more difficult it is to collude, because benefits of divergence from collusion will be improved if products’ substitutability is enhanced. Häckner (1994)¹ argues that firms are easy to maintain the price collusion in the market with small vertical product differentiation because the betrayal motivation is always strong for firms which produce high quality products. When the degree of product differentiation is large, firms which produce high-quality products can obtain high profits without collusion, so their motivation for collusion is not strong. However, the reduction in the degree of vertical product differentiation will lower the quality advantage of firms producing high-quality products, thereby improving their collusion incentives. Therefore, the reduction in the degree of product differentiation makes the collusion easy to maintain. Symeonidis (1999) gets the same conclusion as Hackner (1994).