Publication: Collusion with Capacity Constraints over the Business Cycle
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2003
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Abstract
This paper investigates the e®ect of capacity constraints on the sustainability
of collusion in markets subject to cyclical demand °uctuations. In the absence
of capacity constraints (i.e. a limiting case of our model), Haltiwanger and
Harrington (1991) show that ¯rms ¯nd it more di±cult to collude during periods
of decreasing demand. We ¯nd that this prediction can be overturned if ¯rms'
capacities are su±ciently small. Capacity constraints imply that punishment
pro¯ts move procyclically, so that periods of increasing demand may lead to
lower losses from cheating even if collusive pro¯ts are rising. Haltiwanger and
Harrington's main prediction remains valid for su±ciently large capacities.
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Collusion, Capacity constraints, Business cycles