Communication in Vertical Markets: Experimental Evidence

46 Pages Posted: 9 May 2016

See all articles by Claudia Möllers

Claudia Möllers

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Hans-Theo Normann

University of Duesseldorf

Christopher M. Snyder

Dartmouth College - Department of Economics

Date Written: May 2016

Abstract

When an upstream monopolist supplies several competing downstream firms, it may fail to monopolize the market because it is unable to commit not to behave opportunistically. We build on previous experimental studies of this well-known commitment problem by introducing communication. Allowing the upstream firm to chat privately with each downstream firm reduces total offered quantity from near the Cournot level (observed in the absence of communication) halfway toward the monopoly level. Allowing all three firms to chat together openly results in complete monopolization. Downstream firms obtain such a bargaining advantage from open communication that all of the gains from monopolizing the market accrue to them. A simple structural model of Nash bargaining fits the pattern of shifting surpluses well. We conclude with a discussion of the antitrust implications of open communication in vertical markets.

Suggested Citation

Möllers, Claudia and Normann, Hans-Theo and Snyder, Christopher M., Communication in Vertical Markets: Experimental Evidence (May 2016). NBER Working Paper No. w22219, Available at SSRN: https://ssrn.com/abstract=2777307

Claudia Möllers (Contact Author)

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Hans-Theo Normann

University of Duesseldorf ( email )

Universitätsstraße 1
Dusseldorf, 40225
Germany

Christopher M. Snyder

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/

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