Combinable products, price discrimination, and collusion

Abstract

We analyze the effect of different pricing schemes on the ability of horizontally differentiated firms to sustain collusion when customers are able to mix products to achieve a better match of their preferences. We compare the impacts on the likelihood of collusion and on consumer welfare from three pricing schemes: two-part tariffs, linear prices, and quantity-independent fixed fees. We find that a ban of either price component of the two-part tariff makes it more difficult to sustain collusion at profit-maximizing prices. We also find that whereas linear pricing is the most beneficial pricing schedule for customers in the absence of collusion, it is the most harmful pricing schedule for customers in the presence of collusion.