Product Differentiation and the Ability to Collude: Where Being Different Can Be an Advantage

• Author: David T. Levy,James D. Reitzes
• Published date: 01 June 1993
• Date: 01 June 1993
• DOI: http://doi.org/10.1177/0003603X9303800205
• Subject Matter: Article

The Antitrust Bulletin/Summer 1993 349

Product differentiation and the ability

to collude: where being different

can be an advantage

BY DAVID T.

LEVY·

and JAMES D.

REITZES··

I.

Introduction

Economic models of collusion are central to antitrust policy.

Besides their direct application to price fixing and "conscious par-

allelism" cases, the analyses of the Department of Justice Merger

Guidelines

and the

Department

of

Justice

Vertical

Restraint

Guidelines rely heavily on the collusive model.' One of the rea-

•University of Baltimore.

••

Law and Economics Consulting Group, Inc.

The 1984 Department of Justice Merger Guidelines provides a frame-

work

for

economic

analysis,

see

Salop,

Symposium on Mergers

and

Antitrust, 2J.

ECON.

PERSPECIlVES

3 (1987). While the Guidelines do not

espouse asingle model of anticompetitive behavior, much of the analysis

relies on a model of explicit or implicit collusion. See especially sections

3.41-3.44. In the recently issued 1992 DoJ and FTC Merger Guidelines,

greater attention is given to other types of behavior, including unilateral

actions by firms producing close substitutes.

R. POSNER,

ANrnRUST

LAw

60-61 (1976), and R.

BORK,

THE

ANrnRUST

PARADOX (1978), claim that antitrust should be concerned almost exclusively

with the threat of collusion.

CD

1993by Federal Legal Publications, Inc.

350 The antitrust bulletin

sons for its central role is intuitive appeal.

Collusion

has the

potential to maximize the overall profits of firms in an industry.>

In addition, the collusion model yields a number of direct impli-

cations for evaluating the likelihood of anticompetitive behavior.

One of the standard implications is that collusion is less likely

in industries characterized by product differentiation.? In such

industries, it is claimed that a more complex set of prices must be

established and enforced for collusion to be effective. This claim

may have substantial impact since many of the markets subject to

antitrust investigation are composed

of

differentiated products.'

Nevertheless,

it

depends

on the

special

assumption

that

each

firm's product competes on equal terms with all other brands in

the industry, i.e., competition between each brand is symmetric.

Indeed, the symmetry assumption underlies other

well-known

implications of the collusion model, including the basic tenet that

collusion is more likely in concentrated industries.>

2Cartels maximize profits by adopting the monopoly price of the

industry. Consumers bear the cost of higher prices and welfare is reduced

as some consumers make fewer purchases. See e.g., J.

TIROLE,

THE

THEORY

OF

INDUSTRIAL

ORGANIZATION

60-69 (1989).

3See e.g., F.

SCHERER

&D. Ross,

INDUSTRIAL

MARKET

STRUCTURE

AND

ECONOMIC

PERFORMANCE

200-05 (1990); R.

POSNER,

supra note 1, or

the Merger Guidelines.

Out of 70 merger cases involving second requests for information

[compiled by the FTC and described in Coate, Higgins, &McChesney,

Bureaucracy and Politics in FTC Merger Challenges, 23 J.

LAW

&

ECON.

2 (1990)], economic staff examined the extent of product diversity

in 46 cases. Within this group, the staff found 33 cases to be hetero-

geneous goods markets. This statistical information is released pursuant

to FTC Commission Rule 5.12(c) (16 C.F.R. §5.12(c».

F.

SCHERER

&D. Ross, supra note 3, at 283, find that "between 33

and 50 percent of the concentrated industries supply products hetero-

geneous enough to pose fairly difficult obstacles to tacit coordination."

This is the most prominent implication of collusive models, and

provides the impetus for emphasizing concentration measures in antitrust

investigations. See also F.

SCHERER

&D. Ross, supra note 3.