This paper studies implicitly colluding oligopolists facing fluctuatingdemand. The credible threat of future punishments provides the discipline that facilitates collusion. However, the authors find that the temptation to unilaterally deviate from the collusive outcome is often greater when demand is high. To moderate this temptation, the optimizing oligopoly reduces its profitability at such times, resultingin lower prices. The behavior of the railroads in the 1880s, the automobile industry in the 1950s, the cyclical behavior of cement prices, and of price-cost margins are consistent with this theory. Thereduction of price by the oligopolistic sectors may have macro consequences.

In macroeconomic models with flexible wages and prices, whether a tax is levied on producers or consumers does not affect its ultimate incidence. This equivalence breaks down in the presence of short-run nominal rigidities. Using both British and American data, we provide evidence against complete wage and price flexibility.