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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Find related papers by JEL classification: 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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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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