Collusion, competition and piracy

Abstract

In this article we analyse firms' ability to tacitly collude on prices in an infinitely repeated duopoly game of vertical product differentiation. We show that firms collude if and only if their discount factor is high enough, that is, if they value future profits sufficiently. We also show that a lower cost of copying facilitates collusion but that a higher quality of the copy hinders collusion. Thus, the overall effect of these new characteristics of copies made by consumers is ambiguous.

Acknowledgements

The author acknowledges the financial support from the Spanish MICINN under the project ECO2010-19830, Junta de Andalucía under the project P08-SEJ-03781 and the Instituto Valenciano de Investigaciones Económicas. Any remaining errors are the author's alone.

Notes

¹Peitz and Waelbroeck (2006) for a survey of piracy in which copies are made exclusively by end consumers. However, there is another literature that analyses the case of a single firm that illegally makes copies and sells them on the market, which is known as commercial piracy (López-Cuñat and Martínez-Sánchez, 2009; Martínez-Sánchez, 2010).

²For a more detailed analysis, see Belleflamme and Picard (2007).

³Belleflamme and Picard (2007) found a mixed-strategy equilibrium when .

⁴See Belleflamme and Picard (2007).