supergame-theoretic model of price wars during booms

The response of oligopolies to fluctuations in the demand for their products is explored. It is contended on theoretical grounds that implicitly colluding oligopolies are likely to behave more competitively in periods of high demand. The possibility that oligopolistic behavior has macroeconomic consequences is considered. It is shown that the increase in competitiveness that results from a shift in demand toward goods produced by oligopolies may be sufficient to increase the output of all sectors. It is noted that oligopolies find implicit collusion of this type more difficult when their demand is relatively high. The strongest results are for the case in which prices are the strategic variables and marginal costs are constant; then, increases in demand beyond a certain point actually lower the oligopoly's prices monotonically. The analysis presented appears to provide more support for the theory presented than for the industrial organization tradition.