#97-DOF-26 "Implicit Collsion Models of Export Pricing: An Econometric
            Application to the Japanese Case"
          ¡ÊEiichi Tomiura, July 1997.¡Ë

A WHOLE SENTENCE

ABSTRACT

    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.