A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms
AbstractThis paper studies implicitly colluding oligopolists facing fluctuating demand. The credible threat of future punishments provides the discipline that facilitates collusion. However, we find that the temptation to unilaterally deflate from the collusive outcome is often greater when demand is high. To moderate this temptation,the optimizing oligopoly reduces its profitability at such times,resulting in lower prices. If the oligopolists' output is an input to other sectors, their output may increase too. This explains the co-movements of outputs which characterize business cycles. The behavior of the railroads in the 1880's, the automobile industry in the 1950's and the cyclical behavior of cement prices and price-cost margins support our theory. (J.E.L. Classification numbers:020, 130, 610).
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1412.
Date of creation: Aug 1984
Date of revision:
Publication status: published as Rotemberg and Saloner, American Economic Review, Vol. 76, June 1986, pp. 38 0-407
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- Julio J. Rotemberg & Garth Saloner, 1984. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms," Working papers 349, Massachusetts Institute of Technology (MIT), Department of Economics.
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Interpreting information, markups, and the economic cycle
by Matt Nolan in TVHE on 2012-09-04 19:00:52
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