This chapter sets out to test two interesting lines of recent development in oligopoly theory. The first, arising out of the analysis of infinitely repeated games, suggests conditions under which collusive outcomes can be supported as non-cooperative equilibria by appropriate threat strategies. The second considers the nature of equilibrium in a homogeneous duopoly in which firms set prices subject to fixed capacity constraints. Both these bodies of theory are discussed more fully in the next section.
The data used for the tests are given in a report on the UK Monopolies and Merger Commission (MMC) inquiry into price behaviour in the UK market for white salt. In this market two firms produce an essentially homogeneous commodity with blockaded entry and fixed capacities. The report provides detailed data on prices, outputs, and (marginal) costs as well as a great deal of more qualitative information which is valuable in interpreting these data. The information in the report is derived directly from the working of a real-world oligopoly. Its main drawback is that it relates only to five years, and does not allow standard econometric methods to be applied, in particular to the estimation of a demand function.
Nevertheless, this chapter hopes to demonstrate that some quite strong conclusions can still be drawn, in particular on the extent to which the various possible equilibrium concepts proposed by the theoretical literature can explain the apparent nature of the equilibrium in this case.