Collusion with Capacity Constraints over the Business Cycle
AbstractThis paper investigates the effect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand fluctuations. In the absence of capacity constraints (i.e. a limiting case of our model), Haltiwanger and Harrington (1991) show that firms find it more difficult to collude during periods of decreasing demand. We find that this prediction can be overturned if firms' capacities are sufficiently small. Capacity constraints imply that punishment profits move procyclically, so that periods of increasing demand may lead to lower losses from cheating even if collusive profits are rising. Haltiwanger and Harrington's main prediction remains valid for suÂ±ciently large capacities.
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Bibliographic InfoPaper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt1cv2d2ww.
Date of creation: 01 Jul 2003
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Other versions of this item:
- Fabra, Natalia, 2006. "Collusion with capacity constraints over the business cycle," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 69-81, January.
- Natalia Fabra, 2003. "Collusion with Capacity Constraints over the Business Cycle," Industrial Organization 0308001, EconWPA.
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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