Working Paper: NBER ID: w1412
Authors: Julio J. Rotemberg; Garth Saloner
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).
Keywords: Oligopoly; Business Cycles; Price Wars; Collusion
JEL Codes: D43; E32; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high demand periods (J23) | more competitive output allocation (L11) |
| high demand (J23) | allocation of resources approaches a competitive equilibrium (D61) |
| demand shifts towards oligopolistic sectors (D43) | overall output increases (E23) |
| high demand (J23) | price wars are more likely to occur (L11) |
| high demand (J23) | lower prices (P22) |
| high demand (J23) | greater output in the oligopolistic sector (D43) |