Vertical Foreclosure in Experimental Markets

54 Pages Posted: 29 Sep 2000

See all articles by Stephen Martin

Stephen Martin

Purdue University - Department of Economics

Hans-Theo Normann

Heinrich Heine University Dusseldorf - Department of Economics; Max Planck Institute for Research on Collective Goods

Christopher M. Snyder

Dartmouth College - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: October 8, 1999

Abstract

We report the results of experiments designed to test recent theories of vertical foreclosure. Consistent with the theory, the upstream firm has more difficulty commiting to supply the monopoly quantity in treatments with non-integration and secret contracts than in either treatments with integration or treatments with public contracts. Integration allows the upstream firm to extract a larger share of surplus than public contracts, a bargaining effect which has been underemphasized in the recent foreclosure literature. Motivated by a number of observations that are difficult to reconcile with existing theory, we extend received theory by allowing downstream subjects to have heterogeneous out-of-equilibrium beliefs (a mixture of passive and symmetric beliefs). The resulting model generates a number of surprising results about the structure of optimal contracts. We conclude with a comparison of our results to those of previous experiments on bargaining.

Keywords: vertical foreclosure, vertical integration, market experiments

JEL Classification: L12, L22, C90, D82

Suggested Citation

Martin, Stephen and Normann, Hans-Theo and Snyder, Christopher M., Vertical Foreclosure in Experimental Markets (October 8, 1999). Available at SSRN: https://ssrn.com/abstract=241932 or http://dx.doi.org/10.2139/ssrn.241932

Stephen Martin

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

Hans-Theo Normann

Heinrich Heine University Dusseldorf - Department of Economics ( email )

Duesseldorf
Germany

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Christopher M. Snyder (Contact Author)

Dartmouth College - Department of Economics ( email )

301 Rockefeller Hall
Hanover, NH 03755
United States
(603) 646-0642 (Phone)
(603) 646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~csnyder/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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