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Econometrics Paper
Testing Game-Theoretic Models of Price Fixing Behaviour
V A Hajivassiliou
March 1997
Paper No' EM/1997/324:

Tags: price-fixing; trigger-price mechanism; switching regression models; measurement errors; simulation estimation.

This paper analyses price fixing by the Joint Executive Committee railroad cartel from 1880 to 1886 and develops tests of two game-theoretic models of tacit collusion. The first model, due to Abreu, Pearce and Stacchetti (1986), predicts that price will switch across regimes according to a Markov process. The second model, by Rotemberg and Saloner (1986), concludes that price wars are more likely in periods of high industry demand. Switching regressions are used to model the firms? shifting between collusive and punishment behaviour. The main econometric novelty introduced in this paper is that misclassification probabilities are allowed to vary endogenously over time. The JEC data set is expanded to include measures of grain production to be shipped and availability of substitute transportation services. The findings cast doubt on the applicability of the Rotemberg and Saloner model to the JEC railroad cartel, while they confirm the Markovian prediction of the Abreu et al model.