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Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels

Author

Listed:
  • Christopher Knittel
  • Jason Lepore

    (Department of Economics, University of California Davis)

Abstract

We analyze tacit collusion in an industry characterized by cyclical demand and long-run scale decisions; ?rms face deterministic demand cycles and choose capacity levels prior to competing in prices. Our focus is on the nature of prices. We ?nd that two types of price wars may exist. In one, collusion can involve periods of mixed strategy price wars. In the other, consistent with the Rotemberg and Saloner (1986) de?nition of price wars, we show that collusive prices can also become countercyclical. We also establish pricing patterns with respect to the relative prices in booms and recessions. If the marginal cost of capacity is high enough, holding current demand constant, prices in the boom will be generally lower than the prices in the recession; this reverses the results of Haltiwanger and Harrington (1991). In contrast, if the marginal cost of capacity is low enough, then prices in the boom will be generally higher than the prices in the recession. For costs in an intermediate range, numerical examples are calculated to show specifc pricing patterns.

Suggested Citation

  • Christopher Knittel & Jason Lepore, 2006. "Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels," Working Papers 631, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:06-31
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. L. Lambertini & L. Marattin, 2016. "On Prices' Cyclical Behaviour in Oligopolistic Markets," Working Papers wp1064, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Swoboda, Sandra Maria, 2017. "Einfluss ausgewählter Determinanten auf die Kartellbildung und -stabilität: Eine Literaturstudie," Arbeitspapiere 176, University of Münster, Institute for Cooperatives.
    3. Marcelo Resende & Rodrigo M. Zeidan, 2011. "Tacit Collusion under Imperfect Monitoring in the Canadian Manufacturing Industry: An Empirical Study," CESifo Working Paper Series 3623, CESifo Group Munich.
    4. António Brandão & Joana Pinho & Hélder Vasconcelos, 2014. "Asymmetric Collusion with Growing Demand," Journal of Industry, Competition and Trade, Springer, vol. 14(4), pages 429-472, December.
    5. João Correia-da-Silva & Joana Pinho & Hélder Vasconcelos, 2016. "Sustaining collusion in markets with entry driven by balanced growth," Journal of Economics, Springer, vol. 118(1), pages 1-34, May.
    6. repec:taf:oaefxx:v:3:y:2015:i:1:p:1024022 is not listed on IDEAS
    7. repec:eee:eneeco:v:68:y:2017:i:c:p:410-422 is not listed on IDEAS
    8. Luke Garrod & Matthew Olczak, 2017. "Collusion Under Imperfect Monitoring with Asymmetric Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 65(3), pages 654-682, September.
    9. 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).
    10. repec:bla:jindec:v:64:y:2016:i:4:p:808-834 is not listed on IDEAS
    11. João Correia-da-Silva & Joana Pinho & Hélder Vasconcelos, 2014. "Sustaining collusion in markets with a general evolution of demand," FEP Working Papers 537, Universidade do Porto, Faculdade de Economia do Porto.
    12. repec:bla:jindec:v:65:y:2017:i:3:p:623-653 is not listed on IDEAS

    More about this item

    Keywords

    industrial;

    JEL classification:

    • L0 - Industrial Organization - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L49 - Industrial Organization - - Antitrust Issues and Policies - - - Other

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