Working Paper: NBER ID: w4111
Authors: Eugene Lambson; J. David Richardson
Abstract: A supergame theoretic price-setting model of collusion is calibrated to data from the North American passenger car market before, during, and after the voluntary restraint arrangements (VRAs) with Japan. Conclusions about whether the model is consistent with the bans from the various regimes depend on assumptions about market structure, demand elasticities, and discount factors. If one believes that the price elasticity of auto demand is about one, for example, then the calibrations suggest that in, the pre-VRA and VRA regimes, only General Motors and Ford could conceivably have colluded, and even this limited potential broke down in the post-VRA regime.
Keywords: collusion; auto market; price-setting model; demand elasticity; voluntary restraint arrangements
JEL Codes: L13; L41; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low demand elasticities (D12) | collusion by GM and Ford in pre-VRA and VRA regimes (L49) |
| collusion by GM and Ford in pre-VRA and VRA regimes (L49) | breakdown of collusion in post-VRA regime (D72) |
| assumption of collusion by only three major U.S. firms (D43) | model consistency at elasticities above 6.4, 7.0, and 4.3 across regimes (C51) |
| assumption of collusion by only GM and Ford (L49) | model support at elasticities ranging from 1 to 1.16 and 7.3 (C51) |
| significant Japanese direct foreign investment (F23) | undermining of collusion ability of GM and Ford in post-VRA regime (L49) |