A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms

48 Pages Posted: 3 Feb 2001

See all articles by Julio J. Rotemberg

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

Garth Saloner

Stanford Graduate School of Business

Date Written: August 1984

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).

Suggested Citation

Rotemberg, Julio J. and Saloner, Garth, A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms (August 1984). NBER Working Paper No. w1412. Available at SSRN: https://ssrn.com/abstract=227496

Julio J. Rotemberg (Contact Author)

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

Cambridge, MA
United States
617-495-1015 (Phone)
617-496-5994 (Fax)

National Bureau of Economic Research (NBER) (deceased)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Garth Saloner

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650) 723-1940 (Phone)

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