Liquidation risks in the Rotemberg-Saloner implicit collusion model

We extend the Rotemberg-Saloner's (1986) [Rotemberg, J., Saloner, G., 1986. A supergame-theoretic model of price wars during booms. American Economic Review 76:390-407] "implicit collusion" framework to the consideration of c apital market imperfections, captured by a non-zero probability of liquidat ion of firms in recessionary periods. We show that the Rotemberg-Saloner re sult of countercyclical markups is quite robust to the extension and, moreo ver, liquidation risks may even strengthen the degree of markup countercycl icality. (C) 1999 Elsevier Science S.A. All rights reserved.