Abstract
Price wars, cartel breakdowns, and other seemingly disequilibrium pricing phenomena are examined. Questions of interest include: When do breakdowns occur? How long do they last? What determines their severity? And are they characterized by increased (cross-sectional) price dispersion and/or (temporal) price volatility? The first half of the paper explains how the choice of punishment strategy, the specification of the stochastic shocks to the system, and the assumptions regarding observability determine the pricing dynamics implicit in several theoretical price-war models. Theories are classified into imperfect monitoring models, in which players actions cannot be observed: learning models, in which structural parameters are unknown to the players; and cyclical models, in which observability is perfect but business cycles affect the difficulty of colluding. The second half, in contrast, examines data on prices actually set by firms in industries which are subject to periodic wars. When the models are confronted with the data, we can see how well oligopoly theory explains the behavior of the firms in these industries. The object of the exercise is not to pick a winner. Instead, the role of industry characteristics in determining pricing dynamics is assessed, and the reasons why simple models may fail to explain complex pricing patterns are examined. Finally, directions for future research are suggested by the empirical regularities which are uncovered.
Published Version
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