DISADVANTAGEOUS SEMICOLLUSION

Standard analysis in industrial organization indicates that firms earn higher profits if they collude rather than compete on prices (or quan tities). However, firms choose other strategic variables, such as inve stment in capacity or R&D, in addition to choosing prices or productio n levels. Thus the overall evaluation of product market collusion must take into account its effect on the interaction in the other dimensio ns. This paper demonstrates that collusion in the product market may y ield lower overall profits because it intensifies competition in the o ther dimensions of the interaction.