Sustaining collusion when the choice of strategic variable is endogenous

This paper addresses the problem of maintaining collusion in a differentiated duopoly when both the prospective deviant and punisher are free to choose between price and output as their strategic variables. We show that the traditional formulation of the supergame in which firms commit for the duration to either price or output as their single common strategic variable overlooks the possibility of an asymmetric equilibrium in the 'punishment' phase. The results obtained here have obvious parallels with those found in the comparative statics literature.