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What Collusion? Unilateral Market Power as a Catalyst for Countercyclical Markups

  • Bart Wilson

This paper presents and tests a simple model of competitive and unilateral market power regimes that yields countercyclical markups. Following a decrease in demand in the short run, capacity-constrained firms may have a strong incentive not to lower their prices to the new competitive price. Demand shocks may introduce market power into a previously competitive market. Experimental posted offer markets support this conjecture with complete information on the market structure. With only private information, there appears to be a hysteresis effect concerning supracompetitive prices, i.e., markets with a history of supracompetitive pricing continue to generate supracompetitive prices following demand shocks. However, competitive markets also remain competitive following demand shocks when firms only have private information on costs and capacities. Copyright Kluwer Academic Publishers 1998

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File URL: http://hdl.handle.net/10.1023/A:1009972125288
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Article provided by Springer in its journal Experimental Economics.

Volume (Year): 1 (1998)
Issue (Month): 2 (September)
Pages: 133-145

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Handle: RePEc:kap:expeco:v:1:y:1998:i:2:p:133-145
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  1. Mestelman, Stuart & Welland, Douglas, 1994. "Price Flexibility and Market Performance in Experimental Markets," Economic Theory, Springer, vol. 4(1), pages 105-29, January.
  2. Kyle Bagwell & Robert W. Staiger, 1995. "Collusion Over the Business Cycle," Discussion Papers 1118, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Ketcham, Jon & Smith, Vernon L & Williams, Arlington W, 1984. "A Comparison of Posted-Offer and Double-Auction Pricing Institutions," Review of Economic Studies, Wiley Blackwell, vol. 51(4), pages 595-614, October.
  4. Davis, Douglas D. & Holt, Charles A., 2008. "The Exercise of Market Power in Laboratory Experiments," Handbook of Experimental Economics Results, Elsevier.
  5. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  6. Douglas D. Davis & Charles A. Holt, 1996. "Price rigidities and institutional variations in markets with posted prices (*)," Economic Theory, Springer, vol. 9(1), pages 63-80.
  7. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February.
  8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  9. Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-72, March.
  10. Davis, Douglas D. & Williams, Arlington W., 1997. "The effects of nonstationarities on performance in call markets," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 39-54, January.
  11. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  12. Kandori, Michihiro, 1991. "Correlated Demand Shocks and Price Wars during Booms," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 171-80, January.
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