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Testing Game Theoretic Models of Price-Fixing Behaviour

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Author Info
Vassilis A. Hajivassiliou (Cowles Foundation, Yale University)

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Abstract

This paper analyzes price fixing by the Joint Executive Committee railroad cartel from 1880 to 1886 and develops tests of two game-theoretic models of tacit collusion. The first model, due to Abreu, Pearce and Stacchetti (1986), predicts that price will switch across regimes according to a Markov process. The second, by Rotemberg and Saloner (1986), postulates that price wars are more likely in periods of high industry demand. Switching regressions are used to model the firms' shifting between collusive and punishment behavior. The main econometric novelty in the estimation procedures introduced in this paper is that misclassification probabilities are allowed to vary endogenously over time. The JEC data set is expanded to include measures of grain production to be shipped and availability of substitute transportation services. Our findings cast doubt on the applicability of the Rotemberg and Saloner model to the JEC railroad cartel, while they confirm the Markovian prediction of the Abreu, et al. Model.

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File URL: http://cowles.econ.yale.edu/P/cd/d09a/d0935.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 935.

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Length: 36 pages
Date of creation: Jan 1990
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Handle: RePEc:cwl:cwldpp:935

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Tact collusion; cartels; price competition; railroads; transportation;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June. [Downloadable!] (restricted)
  2. Goldfelfd, Stephen M. & Quandt, Richard E., 1975. "Estimation in a disequilibrium model and the value of information," Journal of Econometrics, Elsevier, vol. 3(4), pages 325-348, November. [Downloadable!] (restricted)
  3. John Haltiwanger & Joseph E. Harrington Jr., 1991. "The Impact of Cyclical Demand Movements on Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 89-106, Spring. [Downloadable!] (restricted)
  4. Michael H. Riordan, 1985. "Imperfect Information and Dynamic Conjectural Variations," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 41-50, Spring. [Downloadable!] (restricted)
  5. Cosslett, Stephen R. & Lee, Lung-Fei, 1985. "Serial correlation in latent discrete variable models," Journal of Econometrics, Elsevier, vol. 27(1), pages 79-97, January. [Downloadable!] (restricted)
  6. Fair, Ray C & Jaffee, Dwight M, 1972. "Methods of Estimation for Markets in Disequilibrium," Econometrica, Econometric Society, vol. 40(3), pages 497-514, May. [Downloadable!] (restricted)
  7. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November. [Downloadable!] (restricted)
  8. Berry, Steven & Briggs, Hugh, 1988. "A non-parametric test of a first-order Markov process for regimes in a non-cooperatively collusive industry," Economics Letters, Elsevier, vol. 27(1), pages 73-77. [Downloadable!] (restricted)
  9. V A Hajivassiliou & DL McFadden, 1997. "The Method of Simulated Scores for the Estimation of LDV Models," STICERD - Econometrics Paper Series /1997/328, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  10. Lee, Lung-Fei & Porter, Robert H, 1984. "Switching Regression Models with Imperfect Sample Separation Information-With an Application on Cartel Stability," Econometrica, Econometric Society, vol. 52(2), pages 391-418, March. [Downloadable!] (restricted)
  11. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 301-314, Autumn. [Downloadable!] (restricted)
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