Endogenous Product Design in an Infinitely Repeated Game

This paper examines the incentives to differentiate products horizontally in a repeated game when redesigning costs are negligible. The main findings are the following. If firms are patient with respect to future profits (i.e. the discount factor is high) they will choose an intermediate degree of differentiation. The lower the discount factor, the more firms are forced to increase differentiation in order to keep collusion from breaking down. Unless the discount factor is extremely low, prices will be unconstrained monopoly prices.