The central point of this note is that the relationship between market power and inflation depends crucially on the source of inflationary shocks. To the extent that inflation is driven by demand shocks, firms with market power are likely to respond by increasing margins, and thereby amplifying...

This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can...