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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

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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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Publisher 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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  1. Juan Pablo Montero & Juan Ignacio Guzmán, 2005. "Welfare-Enhancing Collusion in the Presence of a Competitive Fringe," Documentos de Trabajo 298, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
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  2. 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. [Downloadable!]
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  3. 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. [Downloadable!]
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  4. Dick Damania, 1997. "Debt as a collusive device in an oligopoly supergame," Journal of Economics, Springer, vol. 66(3), pages 249-269, October. [Downloadable!] (restricted)
  5. Pedro Dal Bó, 2001. "Tacit Collusion under Interest Rate Fluctuations," Theory workshop papers 357966000000000030, UCLA Department of Economics. [Downloadable!]
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  6. Bergman, Mats A., 1998. "Endogenous Timing of Investments Yields Modified Stackelberg Outcomes," Working Paper Series in Economics and Finance 272, Stockholm School of Economics. [Downloadable!]
  7. Kyle Hyndman, 2005. "Status Quo Effects in Bargaining: An Empirical Analysis of OPEC," Industrial Organization 0511016, EconWPA. [Downloadable!]
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  8. Philippe Cyrenne, 1999. "On Antitrust Enforcement and the Deterrence of Collusive Behaviour," Review of Industrial Organization, Springer, vol. 14(3), pages 257-272, May. [Downloadable!] (restricted)
  9. de Frutos, Maria-Angeles & Fabra, Natalia, 2007. "Endogenous Capacities and Price Competition: The Role of Demand Uncertainty," CEPR Discussion Papers 6096, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Federico Boffa & Carlo Scarpa, 2009. "An Anticompetitive Effect of Eliminating Transport Barriers in Network Markets," Review of Industrial Organization, Springer, vol. 34(2), pages 115-133, March. [Downloadable!] (restricted)
  11. Pedro Dal Bó, 2002. "Cooperation Under the Shadow of the Future: Experimental Evidence from Infinitely Repeated Games," Working Papers 2002-20, Brown University, Department of Economics. [Downloadable!]
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  12. Arthur Zillante, 2005. "Spaced Out Monopolies: Theory and Empirics of Alternating Product Releases," Industrial Organization 0505008, EconWPA. [Downloadable!]
  13. Rafael Macatangay, 2002. "Tacit Collusion in the Frequently Repeated Multi-Unit Uniform Price Auction for Wholesale Electricity in England and Wales," European Journal of Law and Economics, Springer, vol. 13(3), pages 257-273, May. [Downloadable!] (restricted)
  14. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Tacit Collusion," IDEI Working Papers 186, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  15. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics. [Downloadable!]
  16. Bart Wilson, 1998. "What Collusion? Unilateral Market Power as a Catalyst for Countercyclical Markups," Experimental Economics, Springer, vol. 1(2), pages 133-145, September. [Downloadable!] (restricted)
  17. Chaim Fershtman & Ariel Pakes, 1999. "A Dynamic Oligopoly with Collusion and Price Wars," NBER Working Papers 6936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Gerlach, Heiko, 2007. "Stochastic market sharing, partial communication and collusion," IESE Research Papers D/674, IESE Business School. [Downloadable!]
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  19. Christopher R. Knittel & Jason J. Lepore, 2006. "Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels," NBER Working Papers 12635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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