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Collusion over the Business Cycle

Kyle Bagwell and Robert W. Staiger
The RAND Journal of Economics
Vol. 28, No. 1 (Spring, 1997), pp. 82-106
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555941
Page Count: 25
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Collusion over the Business Cycle
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Abstract

We present a theory of collusive pricing for markets in which demand alternates stochastically between fast-growth (boom) and slow-growth (recession) phases. We show that (1) the most-collusive prices are weakly procyclical (countercyclical) when demand growth rates are positively (negatively) correlated through time, and (2) the amplitude of the collusive pricing cycle is larger when the expected duration of boom phases decreases and when the expected duration of recession phases increases. We also offer a generalization of Rotemberg and Saloner's (1986) model, interpreting their findings in terms of transitory demand shocks that occur within broader business cycle phases.

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