CARTEL UNITY OVER THE BUSINESS-CYCLE

In this paper cartel behaviour in business cycles when some firms are vulnerable to bankruptcy in the downturns is investigated. This vulner ability would restrict the set of collusive equilibria that are feasib le in a repeated game and possibly result in a breakdown, in recession s, of all collusive agreements. It is demonstrated, however, that the existence of a low-cost producer in the cartel could prevent this brea kdown. By adjusting market shares across the business cycle (and there by eliminating the possibility of bankruptcy for its inefficient rival s), this ('swing') producer could enlarge the set of self-enforcing co llusive equilibria. The results of this paper are seen to be consisten t with a wide range of observations on the behaviour of cartels over t he business cycle.