Demand shocks, capacity coordination, and industry performance: lessons from an economic laboratory

Authors


  • We would like to thank James Mak for many motivating discussions and useful feedback, and Mark Armstrong, two anonymous referees, Roger Blair, Tim Cason, Tim Halliday, Rene Kamita, Andreas Leibbrandt, Charles Plott, Bart Wilson, participants of the 2007 Economic Science Association Meetings in Tucson, Arizona, 2008 Western Economic Association International Meetings in Honolulu, Hawaii, and seminar participants at the University of Alaska Anchorage, University of Hawaii at Manoa, and Florida State University for their valuable comments.

Abstract

Antitrust exemptions granted to businesses under extenuating circumstances are often justified by the argument that they benefit the public by helping producers adjust to otherwise difficult economic circumstances. Such exemptions may allow firms to coordinate their capacities, as was the case of the post-September 11, 2001, antitrust immunity granted to Aloha and Hawaiian Airlines. We conduct economic laboratory experiments to determine the effects of explicit capacity coordination on oligopoly firms' abilities to adjust to negative demand shocks and on industry prices. The results suggest that capacity coordination speeds the adjustment process, but also has a clear procollusive effect on firm behavior.

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