Despite a marked tendency for laboratory markets to converge to competitive price predictions, laboratory sellers are sometimes able to maintain prices above competitive levels. A variety of factors have been associated with supra competitive prices in laboratory markets. Plott and Smith (1978) showed that the rules of the market institution are important: prices are higher when sellers choose prices simultaneously in a posted-offer (PO) auction than when buyers and sellers make bids and offers sequentially in an oral double auction (ODA). Smith (1965) attributed price deviations (in an ODA) during an adjustment phase to a relatively low excess supply at supra competitive prices. Dolbear et al. (1968), Isaac and Reynolds (2001), Wellford (1990), Huck, Normann and Oechssler (2000b), and others report that a decrease in the number of sellers tends to increase price levels in several distinct trading institutions.
Information conditions also appear to affect pricing. Dolbear et al. (1968) find that prices are more likely to exceed noncooperative levels when sellers are given complete cost and demand information, as compared with the case in which they must learn about market demand and supply conditions through experience. Huck, Normann and Oechssler (2000a) find more competitive pricing when sellers are given information about the strategic decisions of others and the profit consequences of these decisions.
From an antitrust perspective, the traditional approach to assessing the likelihood of supra-competitive prices is to calculate measures of concentration, and then to consider factors that ‘facilitate’ collusion. Alternatively, antitrust analysis might proceed by evaluating changes in concentration and the effects of various ‘facilitating factors’ in the context of the incentive structure of the underlying market game. In particular, the concept of market power is a useful way to organize the effects of qualitatively different characteristics. Market power is generated when alteration of a particular structural or institutional condition provides an incentive for one or more firms to raise price above a common, competitive price level.
The purpose of this paper is to provide a behavioral analysis of the relationship between pricing behavior and differing notions of market power, ceterus paribus. To do this, we conduct an experiment that consists of a parallel series of markets, with and without static market power, where the trading institution, excess supply, information conditions, the number of sellers, and dynamic market power incentives are held constant. We view this project as an important first step in evaluating a more fully analytical approach to assessing market power. Evaluating market power independent of changes in underlying conditions is important because alterations in underlying conditions can affect both the existence and recognition of both static and dynamic market power.
Notably, our primary focus is on static market power. This power can be can be inferred when one or more sellers can increase current profit with a unilateral price increase above a common competitive level. Static notions of market power, however, are not obviously the most important, because both naturally occurring markets and laboratory market games involve multiple market periods. In repeated games, relatively unprofitably noncooperative equilibria with low stage-game payoffs can serve as punishments that support high levels of collusion in "trigger-price" equilibria.
Indeed, the absence of static power may actually increase market power in a dynamic sense. This is because static market power typically raises noncooperative stage-game profits, thus damping incentives to cooperate: The harsh penalty of competitive pricing may more effectively enforce collusive outcomes than noncooperative outcomes involving supra-competitive prices. If this observation is valid, the antitrust implications are striking; markets that appear to be highly competitive, e.g. markets with large excess capacity, many sellers, etc., may in fact generate the least competitive price outcomes. With sufficiently low discount rates, dynamic market power is pervasive, and this motivated our decision to run parallel series of market, with and without static market power, but always with enough dynamic power to support perfect collusion in a trigger-price equilibrium.
Sections II and III contain discussions of the experimental design and procedures respectively. The price data is analyzed in section IV. The results indicate that static market power has a clear, even dramatic effect in triopoly markets, but the effect in duopoly markets is less clear. The final section contains a discussion of some possible explanations.
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