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A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms

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Author Info
Julio J. Rotemberg
Garth Saloner

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Abstract

This 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1412.

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Date of creation: Aug 1984
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Handle: RePEc:nbr:nberwo:1412

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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. Radner, Roy, 1980. "Collusive behavior in noncooperative epsilon-equilibria of oligopolies with long but finite lives," Journal of Economic Theory, Elsevier, vol. 22(2), pages 136-154, April. [Downloadable!] (restricted)
  2. Porter, Robert H., 1983. "Optimal cartel trigger price strategies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 313-338, April. [Downloadable!] (restricted)
  3. Mordecai Kurz, 1979. "A Strategic Theory of Inflation," NBER Working Papers 0379, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February. [Downloadable!] (restricted)
  5. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Blackwell Publishing, vol. 38(113), pages 1-12, January. [Downloadable!] (restricted)
  6. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August. [Downloadable!] (restricted)
  7. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January. [Downloadable!] (restricted)
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  8. Grossman, Sanford J & Hart, Oliver D & Maskin, Eric S, 1983. "Unemployment with Observable Aggregate Shocks," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 907-28, December. [Downloadable!] (restricted)
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  9. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December. [Downloadable!] (restricted)
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  1. David Genesove & Wallace P. Mullin, 1995. "Validating the Conjectural Variation Method: The Sugar Industry, 1890- 1914," NBER Working Papers 5314, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Catherine J. Morrison, 1989. "Markup Behavior in Durable and Nondurable Manufacturing: A production Theory Approach," NBER Working Papers 2941, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Christian Stoff, 2004. "Establishing Cooperation between Groups: Ingroup versus Outgroup Punishment," Working Papers 0416, University of Zurich, Socioeconomic Institute, revised Feb 2006. [Downloadable!]
  4. Boone, J., 2002. "'Be nice, unless it pays to fight' : a new theory of price determination with implications for competition policy," Discussion Paper 23, Tilburg University, Center for Economic Research. [Downloadable!]
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  5. Roland Strausz, 2004. "Honest Certification and the Threat of Capture," Discussion Papers 25, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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  6. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Federico S. Mandelman, 2006. "Business cycles: a role for imperfect competition in the banking system," Working Paper 2006-21, Federal Reserve Bank of Atlanta. [Downloadable!]
  8. Matti Liski & Juan-Pablo Montero, 2004. "Forward trading and collusion in oligopoly," Working Papers 0412, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
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  9. Rafael Di Tella & Robert MacCulloch, 2002. "Informal Family Insurance And The Design Of The Welfare State," Economic Journal, Royal Economic Society, vol. 112(481), pages 481-503, July. [Downloadable!] (restricted)
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  10. Federico S. Mandelman, 2006. "Business cycles and monetary regimes in emerging economies: a role for a monopolistic banking sector," Working Paper 2006-17, Federal Reserve Bank of Atlanta. [Downloadable!]
  11. Robert Barsky & Mark Bergen & Shantanu Dutta & Daniel Levy, 2001. "What Can the Price Gap between Branded and Private Label Products Tell Us about Markups?," NBER Working Papers 8426, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Sabien Dobbelaere, 2002. "Joint Estimation of Mark-up and Bargaining Power Parameters for Belgian Manufacturing," LICOS Discussion Papers 12102, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  13. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Tacit Collusion," IDEI Working Papers 186, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  14. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and mutual default," Staff Report 124, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
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