Collusion Over the Business Cycle

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.

JEL Classification: E31, E32