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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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References

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  1. Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn.
  2. Staiger, R.W. & Wolak, F.A., 1990. "Collusive Pricing With Capacity Constraints In The Presence Of Demand Uncertainty," Working Papers e-90-14a, Hoover Institution, Stanford University.
  3. Severin Borenstein & Andrea Shepard, 1993. "Dynamic Pricing in Retail Gasoline Markets," NBER Working Papers 4489, National Bureau of Economic Research, Inc.
  4. Dan Kovenock & Raymond J. Deneckere, 1996. "Bertrand-Edgeworth duopoly with unit cost asymmetry (*)," Economic Theory, Springer, vol. 8(1), pages 1-25.
  5. 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.
  6. Kyle Bagwell & Robert W. Staiger, 1995. "Collusion over the Business Cycle," NBER Working Papers 5056, National Bureau of Economic Research, Inc.
  7. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Kandori, Michihiro, 1991. "Correlated Demand Shocks and Price Wars during Booms," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 171-80, January.
  13. 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.
  14. 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.
  15. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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Cited by:
  1. 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.
  2. Knittel, Christopher & Lepore, Jason, 2006. "Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels," Working Papers 06-31, University of California at Davis, Department of Economics.
  3. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.

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