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

Julio Rotemberg and Garth Saloner

No 1412, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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).

Date: 1984-08
Note: EFG
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Citations: View citations in EconPapers (17)

Published as Rotemberg and Saloner, American Economic Review, Vol. 76, June 1986, pp. 38 0-407

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Working Paper: A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms (1984)
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