Implicit Collusion Models of Export Pricing: An Econometric Application to the Japanese Case

This paper tries to provide a framework to analyze the export price competition from a new perspective, by interpreting observed export price variation over time as a result of dynamic changes in the relative sustainability of implicit collusion among exporters.

Two alternative supergame models are adapted from industrial organization literature.

The first model, which originates in Green and Porter(1984), considers the case where decisions by other firms are unobservable. Given the imperfect information, rational firms cut their prices even if all the firms keep the implicit collusion because firms cannot distinguish negative shocks to industry demand from a rival's deviation. This model helps explain how unpredictable negative demand shocks affect export prices.

The second model, which was originally developed by Rotemberg and Saloner(1986), emphasizes the cyclical aspect of export demand movements. If the level of export demand is currently higher than that expected in the future, the present time offers a good opportunity for deviation because the current gain from cheating dominates the future loss from being punished. This theory predicts that implicit collusion amang exporters tends to destabilize during exchange rate depreciation.

To test the relevancy of these two alternative models in the case of Japanese exports, I estimate the export pricing equation by the switching regression with the regime classification dummy which is allowed to follow a Markov transition process and is determined endogenously by the Bayes' rule based on maximum-likelihood estimates. The behavior of textile export price provides evidence supporting the model which predicts that an unanticipated demand decrease triggers a breakdown of collusion. In other idustries, although implied price changes are too moderate, dynamic changes in the sustainability of collusionare consistent with reasonable industrial characteristics. Although theindustries examined here are broadly defined, the econometric study in this paper will be a first-step preliminary experiment on the applicability of dynamic oligopoly models to export pricing.