EconPapers    
Economics at your fingertips  
 

The Impact of Cyclical Demand Movements on Collusive Behavior

John Haltiwanger and Joseph Harrington ()

RAND Journal of Economics, 1991, vol. 22, issue 1, 89-106

Abstract: Recent work by Rotemberg and Saloner (1986) investigates the effect of the business cycle on optimal collusive pricing by specifying that demand is subject to i.i.d. shocks. An implication of the i.i.d. assumption is that firms' expectations on future demand are unrelated to the current level of demand. We put forth a model that allows for both the level of current demand and firms' expectations on future demand to change over time; thus it captures two important properties of the business cycle. Our analysis reveals that while the gain to deviating from a collusive agreement is greatest during booms, firms find it most difficult to collude during recessions, as the forgone profits from inducing a price war are relatively low. An implication of this effect for pricing behavior is that at the same level of demand, price is lower when demand is declining than when demand is rising. Consistent with previous theoretical work, we find that firms price countercyclically for a range of values for the discount factor. However, numerical simulations reveal a greater tendency for firms to price countercyclically during recessions than during booms.

Date: 1991
References: Add references at CitEc
Citations View citations in EconPapers (63) Track citations by RSS feed

Downloads: (external link)
http://links.jstor.org/sici?sici=0741-6261%2819912 ... O%3B2-6&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rje:randje:v:22:y:1991:i:spring:p:89-106

Ordering information: This journal article can be ordered from
https://editorialexp ... i-bin/rje_online.cgi

Access Statistics for this article

More articles in RAND Journal of Economics from The RAND Corporation
Series data maintained by ().

 
Page updated 2017-09-29
Handle: RePEc:rje:randje:v:22:y:1991:i:spring:p:89-106