We analyze tacit collusion in an industry characterized by cyclical demand and long-run scale decisions; firms face deterministic demand cycles and choose capacity levels prior to competing in prices. Our focus is on the nature of prices. We find 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) definition 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 specific pricing patterns.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12635.
Length: Date of creation: Oct 2006 Date of revision: Handle: RePEc:nbr:nberwo:12635
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Kyle Bagwell & Robert W. Staiger, 1995.
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Davidson, Carl & Deneckere, Raymond J, 1990.
"Excess Capacity and Collusion,"
International Economic Review,
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Carl Davidson & Raymond Deneckere, 1984.
"Excess Capacity and Collusion,"
Discussion Papers
675, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Levitan, Richard & Shubik, Martin, 1972.
"Price Duopoly and Capacity Constraints,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February.
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