Hostname: page-component-7dd5485656-glrdx Total loading time: 0 Render date: 2025-10-29T18:36:00.150Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  14 March 2025

Bart J. Wilson
Bart J. Wilson*
Affiliation:
Federal Trade Commission
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Keywords

countercyclical markupsmarket poweroligopoly pricing

JEL classification

E32: Business Fluctuations • Cycles L13: Oligopoly and Other Imperfect Markets

Information

Type
Research Article
Information
Experimental Economics , Volume 1 , Issue 2 , September 1998 , pp. 133 - 145
Copyright
Copyright © 1998 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Bagwell, K. and Staiger, R. (1997). “Collusion over the Business Cycle.” The Rand Journal of Economics. 28, 82–106.CrossRefGoogle Scholar
Davis, D., Harrison, G., and Williams, A. (1993). “The Effects of Nonstationarities on the Convergence to Competitive Equilibria.” Journal of Economic Behavior and Organization. 20, 1–22.Google Scholar
Davis, D. and Holt, C. (1994). “Market Power in Laboratory Markets with Posted Prices.” The Rand Journal of Economics. 25, 467–487.CrossRefGoogle Scholar
Davis, D. and Holt, C. (1997). “Price Rigidities and Institutional Variations in Markets with Posted Prices.” Economic Theory. 9, 63–80.CrossRefGoogle Scholar
Freund, John E. (1992). Mathematical Statistics. 5th ed. Englewood Cliffs. NJ: Prentice Hall.Google Scholar
Hamilton, J.D. (1989). “ANew Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle.” Econometrica. 57(2), 357–384.CrossRefGoogle Scholar
Holt, C. (1989). “The Exercise of Market Power in Laboratory Experiments.” Journal of Law and Economics. 32, S107–S130.CrossRefGoogle Scholar
Kandori, M. (1991). “Correlated Demand Shocks and Price Wars during Booms.” Review of Economic Studies. 58, 171–180.CrossRefGoogle Scholar
Ketcham, Smith J.V., and Williams, A. (1984). “A Comparison of Posted-Offer and Double-Auction Pricing Institutions.” Review of Economic Studies. 51, 595–614.CrossRefGoogle Scholar
Kreps, D.M. and Scheinkman, J.A. (1983). “Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes.” Bell Journal of Economics. 14, 326–337.CrossRefGoogle Scholar
Kruse, J., Rassenti, S., Reynolds, S., and Smith, V. (1994). “Bertrand-Edgeworth Competition in Experimental Markets.” Econometrica. 62, 343–372.CrossRefGoogle Scholar
Levitan, R. and Shubik, M. (1972). “Price Duopoly and Capacity Constraints.” International Economic Review. 13, 111–122.CrossRefGoogle Scholar
Mestelman, S. and Welland, J. (1994). “Price Flexibility and Market Performance in Experimental Markets.” Economic Theory. 4, 105–129.CrossRefGoogle Scholar
Reynolds, S. and Wilson, B. (1997). “Market Power, Price Markups, and Capacity Investment Under Uncertain Demand.” Working Paper, University of Arizona.Google Scholar
Rotemberg, J. and Saloner, G. (1986). “A Supergame-Theoretic Model of Price Wars during Booms.” American Economic Review. 76, 390–407.Google Scholar
Staiger, R. and Wolak, F. (1992). “Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty.” The Rand Journal of Economics. 23, 203–220.CrossRefGoogle Scholar
Wilson, B. and Reynolds, S. (1998). “Price Movements over the Business Cycle in U.S. Manufacturing Industries.” Federal Trade Commission Working Paper # 219.Google Scholar