Cartel stability in advertising-intensive and R&D-intensive industries

Collusive pricing by firms producing a vertically differentiated product is less likely the larger the 'quality' difference between them, because, as one firm increases its investment in product quality or brand image, a low-spending rival is increasingly unlikely to adhere to a collusive arrangement. This result is robust to whether firms set prices or quantities and may explain the low occurrence of collusive pricing in advertising-intensive and R&D-intensive industries. (C) 1999 Elsevier Science S.A. All rights reserved.