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Collusion over the Business Cycle

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Author Info
Kyle Bagwell
Robert W. Staiger

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Abstract

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.

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Date of creation: Mar 1995
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Publication status: published as Rand. Journal of Economics, Spring 1997.
Handle: RePEc:nbr:nberwo:5056

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L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 1-17, Spring. [Downloadable!] (restricted)
  2. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [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. Kandori, Michihiro, 1991. "Correlated Demand Shocks and Price Wars during Booms," Review of Economic Studies, Blackwell Publishing, vol. 58(1), pages 171-80, January. [Downloadable!] (restricted)
  5. Glenn Ellison, 1994. "Theories of Cartel Stability and the Joint Executive Committee," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 37-57, Spring. [Downloadable!] (restricted)
  6. Judith A. Chevalier & David S. Scharfstein, 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence," NBER Working Papers 4614, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  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. Severin Borenstein & Andrea Shepard, 1993. "Dynamic Pricing in Retail Gasoline Markets," NBER Working Papers 4489, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Robert W. Staiger & Frank A. Wolak, 1992. "Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 203-220, Summer. [Downloadable!] (restricted)
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  10. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December. [Downloadable!] (restricted)
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  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)
  12. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics. [Downloadable!]
    Other versions:
  2. Michael Noel, 2004. "Edgeworth Cycles and Focal Prices: Computational Dynamic Markov Equilibria," University of California at San Diego, Economics Working Paper Series 2004-13, Department of Economics, UC San Diego. [Downloadable!]
  3. Kyle Bagwell & Asher Wolinsky, 2000. "Game Theory and Industrial Organization," Discussion Papers 1307, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  4. Rickard Eriksson, 2000. "Market Structure and Price Responses to Seasonal Demand Changes," Econometric Society World Congress 2000 Contributed Papers 1864, Econometric Society. [Downloadable!]
  5. Pedro Dal Bó, 2001. "Tacit Collusion under Interest Rate Fluctuations," Theory workshop papers 357966000000000030, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Robert Gagné & Simon Van Norden & Bruno Versaevel, 2006. "Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline," Post-Print halshs-00142516_v1, HAL. [Downloadable!]
    Other versions:
  7. Kyle Hyndman, 2005. "Status Quo Effects in Bargaining: An Empirical Analysis of OPEC," Industrial Organization 0511016, EconWPA. [Downloadable!]
    Other versions:
  8. Pot Erik & Peeters Ronald & Peters Hans & Vermeulen Dries, 2008. "Noncooperative Collusion and Price Wars with Individual Demand Fluctuations," Research Memoranda 017, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  9. David A. Miller, 2005. "The dynamic cost of ex post incentive compatibility in repeated games of private information," Game Theory and Information 0510002, EconWPA. [Downloadable!]
  10. Pedro Dal Bo, 2002. "Three Essays on Repeated Games," Levine's Working Paper Archive 618897000000000038, UCLA Department of Economics. [Downloadable!]
  11. Bart Wilson, 1998. "What Collusion? Unilateral Market Power as a Catalyst for Countercyclical Markups," Experimental Economics, Springer, vol. 1(2), pages 133-145, September. [Downloadable!] (restricted)
  12. Kyle Bagwell & Robert Staiger, 2003. "Protection and the Business Cycle," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 3(1), pages 1139-1139. [Downloadable!] (restricted)
    Other versions:
  13. Francisco Ruiz-Aliseda & Jianjun Wu, 2007. "Irreversible Investment in Stochastically Cyclical Markets," Economics Working Papers 1018, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  14. Eriksson, Rickard, 2001. "Price Responses to Seasonal Demand Changes in the Swedish Gasoline Market," Working Paper Series in Economics and Finance 473, Stockholm School of Economics, revised 20 Dec 2001. [Downloadable!]
  15. Juan Pablo Montero & Juan Ignacio Guzmán, 2005. "Welfare-Enhancing Collusion in the Presence of a Competitive Fringe," Documentos de Trabajo 298, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
    Other versions:
  16. Pedro Dal Bó, 2002. "Cooperation Under the Shadow of the Future: Experimental Evidence from Infinitely Repeated Games," Working Papers 2002-20, Brown University, Department of Economics. [Downloadable!]
    Other versions:
  17. Natalia Fabra, 2003. "Collusion with Capacity Constraints over the Business Cycle," Industrial Organization 0308001, EconWPA. [Downloadable!]
    Other versions:
  18. Asplund, Marcus & Eriksson, Rickard & Strand, Niklas, 2001. "Prices, Margins and Liquidity Constraints: Swedish Newspapers 1990-1996," Working Paper Series in Economics and Finance 470, Stockholm School of Economics. [Downloadable!]
    Other versions:
  19. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics. [Downloadable!]
  20. Chaim Fershtman & Ariel Pakes, 1999. "A Dynamic Oligopoly with Collusion and Price Wars," NBER Working Papers 6936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  21. Christopher R. Knittel & Jason J. Lepore, 2006. "Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels," NBER Working Papers 12635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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