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Collusion with Capacity Constraints over the Business Cycle

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  • Natalia Fabra

    (Universidad Carlos III de Madrid)

Abstract

This paper investigates the effect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand fluctuations. In the absence of capacity constraints (i.e. a limiting case of our model), Haltiwanger and Harrington (1991) show that firms find it more difficult to collude during periods of decreasing demand. We find that this prediction can be overturned if firms' capacities are sufficiently small. Capacity constraints imply that punishment profits move procyclically, so that periods of increasing demand may lead to lower losses from cheating even if collusive profits are rising. Haltiwanger and Harrington's main prediction remains valid for su±ciently large capacities.

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File URL: http://128.118.178.162/eps/io/papers/0308/0308001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 0308001.

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Length: 24 pages
Date of creation: 31 Aug 2003
Date of revision:
Handle: RePEc:wpa:wuwpio:0308001

Note: Type of Document - pdf; prepared on PC; pages: 24 ; figures: included
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Web page: http://128.118.178.162

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Keywords: Collusion; Capacity Constraints; Business Cycles;

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  1. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
  2. 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.
  3. Osborne, Martin J. & Pitchik, Carolyn, 1983. "Price Competition in a Capacity-Constrained Duopoly," Working Papers 83-08, C.V. Starr Center for Applied Economics, New York University.
  4. Lambson, Val Eugene, 1987. "Optimal Penal Codes in Price-Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 385-97, July.
  5. Brock, William A & Scheinkman, Jose A, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 371-82, July.
  6. Dan Kovenock & Raymond J. Deneckere, 1996. "Bertrand-Edgeworth duopoly with unit cost asymmetry (*)," Economic Theory, Springer, vol. 8(1), pages 1-25.
  7. Kandori, Michihiro, 1991. "Correlated Demand Shocks and Price Wars during Booms," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 171-80, January.
  8. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  9. Rosenbaum, David I., 1989. "An empirical test of the effect of excess capacity in price setting, capacity-constrained supergames," International Journal of Industrial Organization, Elsevier, vol. 7(2), pages 231-241, June.
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Citations

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Cited by:
  1. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.
  2. 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.
  3. Federico Boffa & Carlo Scarpa, 2009. "An Anticompetitive Effect of Eliminating Transport Barriers in Network Markets," Review of Industrial Organization, Springer, vol. 34(2), pages 115-133, March.
  4. Johannes Paha, 2013. "The Impact of Persistent Shocks and Concave Objective Functions on Collusive Behavior," MAGKS Papers on Economics 201328, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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