In this paper, I examine the effect of the degree of volatility as well as the effect of a positive demand shock itself on an oligopoly"s pricing. I first define three measures of demand shock and measures of their volatilities. The data examined in this study support my hypothesis regarding the importance of the demand shock volatility in influencing implicit collusion in the oligopolistic pricing behavior. Demand shock volatility actually yields a negative effect on the price level of the implicit collusion. When the demand shock becomes more volatile, the loss incurred by deviation becomes smaller in the next period, while the profits from deviation become larger. In such a case, a single firm is more likely to deviate from its implicit collusive price in this case. Therefore, the oligopoly lowers its collusion price tremendously so as to prevent the deviation of any individual firm. Also, the demand shock volatility influences the effect of a positive demand shock, actually increasing the effect of a positive demand shock. The price level is decreased further to discourage a deviation of an individual firm, since a single firm is more likely to want to deviate as the demand shock volatility increases. Therefore, the implicit collusion price should be much lower than the price on a positive demand shock with less volatility.
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