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

Christopher Knittel and Jason Lepore
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Jason Lepore: Department of Economics, University of California Davis

No 98, Working Papers from University of California, Davis, Department of Economics

Abstract: We analyze tacit collusion in an industry characterized by cyclical demand and long-run scaledecisions; ?rms face deterministic demand cycles and choose capacity levels prior to competingin 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, consistentwith the Rotemberg and Saloner (1986) de?nition of price wars, we show that collusive pricescan also become countercyclical. We also establish pricing patterns with respect to the relativeprices in booms and recessions. If the marginal cost of capacity is high enough, holding currentdemand 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 costof capacity is low enough, then prices in the boom will be generally higher than the prices inthe recession. For costs in an intermediate range, numerical examples are calculated to showspecifc pricing patterns.

Keywords: industrial (search for similar items in EconPapers)
JEL-codes: L0 L1 L13 L49 (search for similar items in EconPapers)
Pages: 45
Date: 2006-11-15
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Related works:
Journal Article: Tacit collusion in the presence of cyclical demand and endogenous capacity levels (2010)
Working Paper: Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels (2006)
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