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Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty

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Author Info

  • Robert W. Staiger
  • Frank A. Wolak

Abstract

We explore the response of collusive prices to changing demand conditions when firms operate under capacity constraints in the presence of demand uncertainty. We find support for the conventional view that periods of low demand lead, through the emergence of excess capacity, to a breakdown of collusive pricing. We also find that the nature of price wars depends on the degree of excess capacity in the industry; while small amounts of excess capacity can lead firms to engage in "mild" price wars, characterized by uniform price reductions and market share stability, more "severe" price wars, characterized by price undercutting and market share instability, can emerge if excess capacity is sufficiently great. Finally, our results lend support to the view that market share instability is a symptom of ineffective collusion.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 23 (1992)
Issue (Month): 2 (Summer)
Pages: 203-220

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Handle: RePEc:rje:randje:v:23:y:1992:i:summer:p:203-220

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Cited by:
  1. Andrei Y. Shastitko & Svetlana V. Golovanova, 2014. "Collusion in markets characterized by one large buyer: lessons learned from an antitrust case in Russia," HSE Working papers WP BRP 49/EC/2014, National Research University Higher School of Economics.
  2. Johri, Alok, 2001. "Markups and the Seasonal Cycle," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 367-395, July.
  3. Kyle Hyndman, 2004. "Status Quo Effects In Bargaining: An Empirical Analysis of OPEC," Econometric Society 2004 North American Summer Meetings 285, Econometric Society.
  4. Hyndman, Kyle, 2008. "Disagreement in bargaining: An empirical analysis of OPEC," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 811-828, May.
  5. Kyle Bagwell & Garey Ramey, 1992. "The Diamond Paradox: A Dynamic Resolution," Discussion Papers 1013, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Kyle Bagwell & Robert W. Staiger, 1995. "Collusion Over the Business Cycle," Discussion Papers 1118, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Lee, Hwa Ryung, 2009. "Bankruptcies and low-cost Carrier Expansion in the Airline Industry," Department of Economics, Working Paper Series qt8g8639tn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.
  9. Blum, Bernardo S. & Claro, Sebastian & Horstmann, Ignatius J., 2013. "Occasional and perennial exporters," Journal of International Economics, Elsevier, vol. 90(1), pages 65-74.

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