Does Auctioning of Entry Licenses Affect Consumer Prices?: An Experimental Study

Abstract

On an increasing scale auctions are used to allocate the licenses to operate on markets which are thought not suited for free entry. According to standard economic arguments, the license fees paid at the auction will not affect consumer prices since they constitute a sunk cost. This standard view is not uncontested though. In the present paper we experimentally investigate two arguments for a potential upward effect of auctioning on prices: the incorporation of entry fees in prices due to the use of mark-up pricing rules, and the tendency of auctions to select the more collusive firms. Our results indicate that auctioning increases the probability of high prices, and that this is mainly due to the use of mark-up pricing rules.