Product differentiation, imperfect information and collusion

Firms can relax price competition by producing differentiated products. This dissertation separately incorporates two additional elements, consumers' imperfect information about product characteristics and price collusion, into a standard model of horizontal product differentiation to evaluate their effect on the pricing behavior of firms.; The presence of consumers who are uninformed about products' characteristics complicates the firms' pricing decisions. A firm is torn between setting a high price to profit from loyal informed consumers and a low price to undercut its rivals and sell to the uninformed consumers. Pure strategy Nash equilibrium prices do not exist; however, a mixed-strategy equilibrium does exist.; In contrast to the effect of consumers' imperfect information about the prices of homogeneous products, imperfect information about product differentiation intensifies price competition as firms compete for uninformed consumers who buy on the basis of price. Collectively, consumers can benefit from the imperfect information as the increased price competition offsets the disutility that comes from uninformed consumers being matched with the wrong product for their tastes.; There are conflicting effects on prices to changes in the number of firms when consumers are imperfectly informed about product differentiation, an information effect where there is a smaller probability that a firm will be the low priced firm the more firms there are, reducing the incentive to price low, and a competition effect from products becoming closer substitutes. Generally, the competition effect dominates and prices fall as the number of firms increases; however, when the proportion of uninformed consumers is sufficiently low, prices increase as the number of firms increases.; Producing differentiated products affects the ability of firms to collude on price. The gains to a firm from cheating on a collusive agreement are smaller the more differentiated the products are, but the punishment is also less severe. In an infinitely repeated Hotelling duopoly, collusion is easier to sustain the more differentiated the products are. Also, a firm might produce a fighting brand, a product that is a close substitute for a rival's, to increase the severity of punishment and further enhance the ability of firms to collude.