Working Paper: NBER ID: w12635
Authors: Christopher R. Knittel; Jason J. Lepore
Abstract: We analyze tacit collusion in an industry characterized by cyclical demand and long-run scale decisions; firms face deterministic demand cycles and choose capacity levels prior to competing in prices. Our focus is on the nature of prices. We find 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) definition 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 specific pricing patterns.
Keywords: tacit collusion; cyclical demand; endogenous capacity; pricing behavior
JEL Codes: L00; L11; L13; L49
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high marginal cost of capacity (D24) | lower collusive prices in boom (D43) |
| low marginal cost of capacity (D24) | higher collusive prices in boom (D43) |
| capacity levels (D24) | pricing behavior (D40) |
| capacity costs (D24) | pricing behavior (D40) |
| high marginal costs (D40) | lower prices in booms (E30) |
| low marginal costs (D40) | higher prices in booms (E30) |
| capacity constraints (D24) | pricing patterns (D49) |