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Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels

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  • Christopher Knittel
  • Jason Lepore

    (Department of Economics, University of California Davis)

Abstract

We 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 Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 631.

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Length: 45
Date of creation: 16 Nov 2006
Date of revision:
Handle: RePEc:cda:wpaper:06-31

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Keywords: industrial;

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References

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  1. Kandori, Michihiro, 1991. "Correlated Demand Shocks and Price Wars during Booms," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 171-80, January.
  2. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
  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.
  4. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  5. Deneckere, Raymond J & Kovenock, Dan, 1992. "Price Leadership," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 143-62, January.
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  6. Brock, William A & Scheinkman, Jose A, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 371-82, July.
  7. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 27-41, January.
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  16. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  17. Carl Davidson & Raymond Deneckere, 1984. "Excess Capacity and Collusion," Discussion Papers 675, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Robert W. Staiger & Frank A. Wolak, 1992. "Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 203-220, Summer.
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Cited by:
  1. Johannes Paha, 2013. "The Impact of Persistent Shocks and Concave Objective Functions on Collusive Behavior," MAGKS Papers on Economics 201328, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. João Correia-da-Silva & Joana Pinho & Hélder Vasconcelos, 2014. "Sustaining collusion in markets with a general evolution of demand," FEP Working Papers 537, Universidade do Porto, Faculdade de Economia do Porto.
  3. Marcelo Resende & Rodrigo M. Zeidan, 2011. "Tacit Collusion under Imperfect Monitoring in the Canadian Manufacturing Industry: An Empirical Study," CESifo Working Paper Series 3623, CESifo Group Munich.
  4. António Brandão & Joana Pinho & Hélder Vasconcelos, 2013. "Asymmetric collusion with growing demand," FEP Working Papers 510, Universidade do Porto, Faculdade de Economia do Porto.

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