Cartel Stability and Product Differentiation

The purpose here is to compute sizes of stable cartels when both degree of homogeneity and market size vary. Noncooperative behaviour is observable without form of a Nash-equilibrium where firms follow pure strategies. Starting from a particular cartel size, the question is whether there exists an incentive for anyone in or outside the cartel to leave or enter into the cartel in order to choose another Nash-equilibrium (with another cartel size) which makes him better. Existing findings that weak and strong homogeneity support cartel stability are confirmed. Here, the results are more extreme. With moderate substitutes no stable cartel is detected. Only with very strong heterogeneity or strong homogeneity stable cartels exist. In the latter case just all-embracing cartels meet stability conditions. Furthermore, in large markets these all-embracing stable cartels can only exist if the degree of homogeneity is sufficiently high.