Motivated by the structure of existing pollution permit markets, we study the equilibrium path that results from allocating an initial stock of storable permits to a large polluting agent and a competitive fringe. A large agent selling permits in the market exercises market power no differently than a large supplier of an exhaustible resource. However, whenever the large agent’s endowment falls short of its efficient endowment –allocation profile that would exactly cover its emissions along the perfectly competitive path– the market power problem disappears, much like in a durable-good monopoly. We illustrate our theory with two applications: the carbon market that may eventually develop under the Kyoto Protocol and beyond and the US sulfur market.

Following the structure of many commodity markets, we consider a few large firms and a competitive fringe of many small suppliers choosing quantities in an infinite-horizon setting subject to demand shocks. We show that a collusive agreement among the large firms may not only bring an output contraction but also an output expansion (relative to the non-collusive output level). The latter occurs during booms and is due to the strategic substitutability of quantities. We also find that the time at which maximal collusion is most difficult to sustain can be either at booms or recessions. The international copper cartel of 1935–39 is used to illustrate some of our results.

When a firm is forced to pay abnormally high wages, hiring transfers rents. This effectively endows the employer with the ability to grant favors, and he may wish to do so even at some cost to efficient production. We refer to this as the brother-in-law effect. This article analyzes its consequences. When the brother-in-law effect is due to unionization, decisions regarding both the number and type of workers employed could be inefficient; overemployment could obtain even relative to the workforce that would be employed without unionization.We also identify cases in which nepotism improves efficiency.

This paper examines a reputation-based mechanism that sustains the provision of high quality in the presence of competition among providers, where the incentive for high-quality production comes from a reputation premium: firms with higher reputations charge higher prices. The way we model the market highlights the fact that prices are not solely determined from consumers' willingness to pay as in the monopolistic setting studied in the previous literature. In effect, equilibrium prices are determined endogenously, from the interaction of the distribution of consumers' valuations for high quality and the distribution of firms' reputations—the demand and the supply sides of the market, respectively. This paper shows that: (i) there is a steady-state distribution of reputations, a result that allows the study of a stationary equilibrium; (ii) there are parameter configurations for which the existence of a high-quality equilibrium is guaranteed, and where the incentives for high quality production in the repeated game depend on the shape of the price function; and (iii) the Walrasian-equilibrium price function depends on the shape of the steady-state distribution of reputations, and the assignment of consumers to firms with different reputation levels in such an equilibrium is positively assortative if quality is a normal good.

We consider a pollution permit market with a large firm and fringe of competitive firms. To smooth compliance towards a long-run emissions goal, firms are initially allocated a stock (i.e., bank) of permits that can be gradually consumed. We first show how the large firm can credibly manipulate the spot market in subgame-perfect equilibrium. Motivated by features observed in the US market for sulfur dioxide emissions, we then show that the introduction of stock transactions has no effects on market power, but that forward trading and incomplete observability of stock holdings do have pro-competitive effects. Copyright Springer Science+Business Media, Inc. 2006