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

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