BAYESIAN ANALYSIS OF CARTEL STABILITY AND REGIME SWITCHING

Empirical analysis of collusive regimes typically requires the construction of structural econometric models, with explicit ties to theoretical models of firm behavior in equilibrium. To that end, theory often elicits a wealth of important information regarding the structural parameters, information that is indispensable in accurately identifying desired phenomena, but nevertheless, is inevitably disregarded by classical techniques. Motivated by these considerations, the paper demonstrates how Bayesian methods may be used to better incorporate such structural knowledge through prior probabilistic beliefs. As a result, Bayesian posterior inference provides a clear and precise empirical interpretation of collusive behavior and cartel stability.