Acta Oeconomica Pragensia 2018, 26(2):56-67 | DOI: 10.18267/j.aop.601

POLICY IMPLICATION OF PRICE COLLUSION IN A DUOPOLY MARKET WITH DIFFERENTIATED PRODUCTS

Doriani Lingga, Damiana Simanjuntak

Department of Economics, Universitas Atma Jaya Yogyakarta, Indonesia (doriani_lingga@staff.uajy.ac.id)

This paper uses a duopoly model with horizontally differentiated products to analyse how price collusion in the presence of a uniform tax affects market equilibrium. Moreover, this paper investigates the effect of price collusion on social welfare and the government's decision in setting the optimal tax. We show that in the presence of a uniform tax, instead of bringing social welfare down as is traditionally believed, price collusion affects government policy implication. We further show that firms still prefer colluding rather than competing, for which the government's policy decision becomes the key point. By allowing the optimal tax to be negative, we find that under Bertrand competition the government can impose a positive, zero or negative tax on firms depending on the level of the product differentiation. There is a tendency that the more heterogeneous the products, the more subsidies will be given. Under price collusion, the government always subsidises firms regardless of the degree of product differentiation. Finally, we show that when the products are sufficiently differentiated, the government will subsidise firms more under collusion than they will under Bertrand. In short, firms can use price collusion to induce the government to subsidise them.

Keywords: Bertrand competition, Collusion, Duopoly Market, Product Differentiation, Tax, Trade Policy, Social Welfare, Subsidy

JEL classification: D60, H21, L30

Published: April 1, 2018  Show citation