ABSTRACT
This chapter discusses the rehabilitation of the kinked demand approach in explaining collusion among producers of homogeneous goods. The kinked demand approach is one of the most known and still used approaches to deal with collusion, although it has been strongly criticized because of its behavioural assumption of asymmetric reaction of competitors to price changes. The chapter provides a simple Hotelling model of product differentiation in which collusion among Nash-like quantity-setting firms producing identical goods is possible because of kinks in demand. In this kind of model, homogeneity of products is a quite restrictive condition in the light of the Principle of Maximum Differentiation which has amended Hotelling's Principle of Minimum Product Differentiation. The chapter examines how and under which conditions kinked demand can support collusive equilibria in quantity-setting Cournotian oligopolies. It analyses the role of kinks in Cournotian oligopolies.
