New Car Prices Under Supply Constraints : Competition or Collusion?

Competitive industries respond to positive demand-side and negative supply-side shocks in predictable ways. Prices will rise and, under some conditions, margins along with them. Margins may rise because of supply shocks, but they do so in competitive markets without collusion among producers. Also, under supply constraints, competitive and monopoly prices are difficult to distinguish and may be identical. Economic theory provides some guidance on distinguishing between the two. Also, this analysis shows why a focus on retail margins is misplaced under supply constraints. The key issue is whether sales are below the competitive, supply-constrained level. While the focus here is on automobile retailing, the analysis applies to other industries facing supply shortages during the Covid Pandemic, as well as the disease-based supply-shocks in egg production