Do Underwriters Compete in IPO Pricing?
We propose and implement, for the first time, a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion in IPO price setting. We construct two models of an IPO underwriting market: in the first one IPO investment banks set underwriting fees competitively, while in the second one they coordinate (collude) in setting fees. The two models lead to different equilibrium relations between market shares and compensation of underwriters of different quality on one hand, and the state of the IPO market on the other hand. We use 39 years' worth U.S. IPO data to examine which of the two models is better aligned with the data. Our empirical results are generally consistent with the implicit collusion hypothesis -- underwriters, especially the larger ones, do not seem to always engage in price competition for underwriting business.