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Oligopolistic pricing over the deterministic market demand cycle: Some evidence from United States portland cement industry
Abstract
The recent development of theoretical models have extended predictions as to how a firm behaves under different assumptions about the future movement in market demands. Rotemberg and Saloner (1986) proposed equilibrium conditions that allow firms to set self-enforcing collusive market prices when demand shocks are independently distributed but observable. Haltiwanger and Harrington (1991) formulated a theory of self enforcing collusion when the market demand cycle is deterministic. They predict that if firms collude, given the same market demand for output, the prices in the bust periods are always lower than in the boom. They also predict that the collusive profit should reach its peak before the market cycle reaches its peak. What is the actual oligopolist behavior, however, still depends on the empirical test that may be applied to each theory. I test their theories using data from the portland cement industry. Portland cement is a major input in construction. The construction activities themselves need to be planned, and take time to complete. Thus the market demand for portland cement in the future is believed to be deterministic. As it is proposed by Haltiwanger and Harrington (1992), when the market demand is deterministic, the firms in an industry may formulate a self-enforcing collusive price. So this study aims to test if there is tacit collusion in any portland cement market in the United States. Both the collusive price and profit properties proposed by Haltiwanger and Harrington are tested in twenty-five regional markets. The price hypothesis is empirically tested by using an equation system comprised of the market demand and supply relations, differentiating the boom and the bust periods of market demand cycles defined from 1974 to 1989 The equation system is simultaneously estimated from panel data using the three-stage least square technique. The estimated prices between the boom and bust support that tacit collusion exists in portland cement markets. The estimated profit paths, however, mitigates the results of the estimated prices because some markets experience a profit peak before a demand peak. A strong support of tacit collusion in portland cement markets needs further study.
Subject Area
Economics|Business costs
Recommended Citation
Sukharomana, Supachat, "Oligopolistic pricing over the deterministic market demand cycle: Some evidence from United States portland cement industry" (1998). ETD collection for University of Nebraska-Lincoln. AAI9902978.
https://digitalcommons.unl.edu/dissertations/AAI9902978