Collusion with Capacity Constraints over the Business Cycle
AbstractThis paper investigates the e®ect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand °uctuations. In the absence of capacity constraints (i.e. a limiting case of our model), Haltiwanger and Harrington (1991) show that ¯rms ¯nd it more di±cult to collude during periods of decreasing demand. We ¯nd that this prediction can be overturned if ¯rms' capacities are su±ciently small. Capacity constraints imply that punishment pro¯ts move procyclically, so that periods of increasing demand may lead to lower losses from cheating even if collusive pro¯ts are rising. Haltiwanger and Harrington's main prediction remains valid for su±ciently large capacities.
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Collusion; Capacity constraints; Business cycles;
Other versions of this item:
- Fabra, Natalia, 2006. "Collusion with capacity constraints over the business cycle," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 69-81, January.
- Natalia Fabra, 2003. "Collusion with Capacity Constraints over the Business Cycle," Industrial Organization 0308001, EconWPA.
- Fabra, Natlia, 2003. "Collusion with Capacity Constraints over the Business Cycle," Department of Economics, Working Paper Series qt1cv2d2ww, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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