February 6, 2009


Tacit collusion in the 1950's automobile industry? Revisiting Bresnahan


This paper revisits the question of whether automobile manufacturers engaged in tacit collusion in the 1950s. In his famous paper, Bresnahan (1987) develops a model of strate- gic interaction between multi-product firms to explain a brief spike in quantity in 1955, and concludes that the episode was caused by a temporary breakdown in tacit collusion. However, his model imposes strong restrictions on the nature of consumer preferences and intra-firm, multi-product pricing strategies. I reconstruct his original dataset and solve a random coefficients logit model that allows for a broader range of substitution patterns and pricing strategies. I estimate the model under multiple firm behavioral hypotheses: Bertrand competition between firms and between brands, and perfect collusion. For no year in 1954-1956 can either form of Bertrand competition be rejected in favor of tacit collusion.

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