Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels
AbstractWe analyze tacit collusion in an industry characterized by cyclical demand and long-run scale decisions; …rms face deterministic demand cycles and choose capacity levels prior to competing in prices. Our focus is on the nature of prices. We …nd that two types of price wars may exist. In one, collusion can involve periods of mixed strategy price wars. In the other, consistent with the Rotemberg and Saloner (1986) de…nition of price wars, we show that collusive prices can also become countercyclical. We also establish pricing patterns with respect to the relative prices in booms and recessions. If the marginal cost of capacity is high enough, holding current demand constant, prices in the boom will be generally lower than the prices in the recession; this reverses the results of Haltiwanger and Harrington (1991). In contrast, if the marginal cost of capacity is low enough, then prices in the boom will be generally higher than the prices in the recession. For costs in an intermediate range, numerical examples are calculated to show specifc pricing patterns.
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Bibliographic InfoPaper provided by University of California, Davis, Department of Economics in its series Working Papers with number 631.
Date of creation: 16 Nov 2006
Date of revision:
Other versions of this item:
- Knittel, Christopher R. & Lepore, Jason J., 2010. "Tacit collusion in the presence of cyclical demand and endogenous capacity levels," International Journal of Industrial Organization, Elsevier, vol. 28(2), pages 131-144, March.
- 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.
- L0 - Industrial Organization - - General
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L49 - Industrial Organization - - Antitrust Issues and Policies - - - Other
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