Abstract
We propose and implement a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion among underwriters. We construct two models of IPO price setting: a model of oligopolistic competition among underwriters and a model of price coordination among them. The two models lead to different equilibrium relations between market shares and compensation of various underwriters on one hand and the state of the IPO market on the other hand. Our empirical results, obtained using 39 years of IPO data, are generally consistent with the implicit collusion hypothesis -- banks, especially larger ones, seem to internalize the effects of their underwriting fees and IPO pricing on their rivals.
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