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A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms

  • Julio J. Rotemberg
  • Garth Saloner

This paper studies implicitly colluding oligopolists facing fluctuating demand. The credible threat of future punishments provides the discipline that facilitates collusion. However, we find that the temptation to unilaterally deflate from the collusive outcome is often greater when demand is high. To moderate this temptation,the optimizing oligopoly reduces its profitability at such times,resulting in lower prices. If the oligopolists' output is an input to other sectors, their output may increase too. This explains the co-movements of outputs which characterize business cycles. The behavior of the railroads in the 1880's, the automobile industry in the 1950's and the cyclical behavior of cement prices and price-cost margins support our theory. (J.E.L. Classification numbers:020, 130, 610).

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File URL: http://www.nber.org/papers/w1412.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1412.

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Date of creation: Aug 1984
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Publication status: published as Rotemberg and Saloner, American Economic Review, Vol. 76, June 1986, pp. 38 0-407
Handle: RePEc:nbr:nberwo:1412
Note: EFG
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  1. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
  2. Porter, Robert H., 1983. "Optimal cartel trigger price strategies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 313-338, April.
  3. Radner, Roy, 1980. "Collusive behavior in noncooperative epsilon-equilibria of oligopolies with long but finite lives," Journal of Economic Theory, Elsevier, vol. 22(2), pages 136-154, April.
  4. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  5. Mordecai Kurz, 1979. "A Strategic Theory of Inflation," NBER Working Papers 0379, National Bureau of Economic Research, Inc.
  6. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  7. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  8. Sanford J. Grossman & Oliver D. Hart & Eric Maskin, 1982. "Unemployment with Observable Aggregate Shocks," NBER Working Papers 0975, National Bureau of Economic Research, Inc.
  9. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  10. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 301-314, Autumn.
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