We present a theory of collusive pricing in markets subject to business cycle fluctuations. In the business cycle model that we adopt, market demand alternates stochastically between fast-growth (boom) and slow-growth (recession) phases. We provide a complete characterization of the most-collusive prices and show that: (1) the most-collusive prices may be procyclical (countercyclical) when demand growth rates are positively (negatively) correlated through time, and (2) the amplitude of the collusive pricing cycle is larger when the expected duration of boom phases decreases and when the expected duration of recession phases increases. We also offer a generalization of Rotemberg and Saloner's (1986) model, and interpret their findings in terms of transitory demand shocks that occur within broader business cycle phases.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5056.
Length: Date of creation: Mar 1995 Date of revision: Handle: RePEc:nbr:nberwo:5056
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Kyle Bagwell & Robert W. Staiger, 1995.
"Collusion Over the Business Cycle,"
Discussion Papers
1118, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Find related papers by JEL classification: L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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