# Cartel Stability under Quality Differentiation

## TL;DR

This paper analyzes how product quality differences impact cartel stability, showing that the lowest-quality firm has the strongest incentive to cheat when cost differences are small.

## Contribution

It introduces a model of cartel stability considering vertical product differentiation and identifies which firm has the strongest incentive to deviate.

## Key findings

- Lowest-quality supplier has the tightest incentive constraint.
- Market shares at pre-collusive levels influence deviation incentives.
- Small cost differences increase the incentive for the lowest-quality firm to cheat.

## Abstract

This note considers cartel stability when the cartelized products are vertically differentiated. If market shares are maintained at pre-collusive levels, then the firm with the lowest competitive price-cost margin has the strongest incentive to deviate from the collusive agreement. The lowest-quality supplier has the tightest incentive constraint when the difference in unit production costs is sufficiently small.