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Testing Game-Theoretic Models of Price Fixing Behaviour

This paper analyzes 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, by Rotemberg and Saloner (1986), postulates 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 behavior. The main econometric novelty in the estimation procedures 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. Our 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.