Cartel Unity over the Business Cycle
In this paper cartel behavior in business cycles when some firms are vulnerable to bankruptcy in the downturns is investigated. This vulnerability would restrict the set of collusive equilibria that are feasible in a repeated game and possibly result in a breakdown, in recessions, of all collusive agreements. It is demonstrated, however, that the existence of a low-cost producer in the cartel could prevent this breakdown. By adjusting market shares across the business cycle (and thereby eliminating the possibility of bankruptcy for its inefficient rivals), this ('swing') producer could enlarge the set of self-enforcing collusive equilibria. The results of this paper are seen to be consistent with a wide range of observations on the behavior of cartels over the business cycle.
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Volume (Year): 30 (1997)
Issue (Month): 3 (August)
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