Supply Function Competition, Private Information, and Market Power: A Laboratory Study

73 Pages Posted: 23 Aug 2016

See all articles by Anna Bayona

Anna Bayona

ESADE Business School

Jordi Brandts

Instituto de Analisis Economico (CSIC) Barcelona

Xavier Vives

University of Navarra - IESE Business School; Universitat Pompeu Fabra (UPF); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Date Written: July 21, 2016

Abstract

In the context of supply function competition with private information, we test in the laboratory whether — as predicted in Bayesian equilibrium — costs that are positively correlated lead to steeper supply functions and less competitive outcomes than do uncorrelated costs. We find that the majority of subjects bid in accordance with the equilibrium prediction when the environment is simple (uncorrelated costs treatment) but fail to do so in a more complex environment (positively correlated costs treatment). Although we find no statistically significant differences between treatments in average behaviour and outcomes, there are significant differences in the distribution of supply functions. Our results are consistent with the presence of sophisticated agents that on average best respond to a large proportion of subjects who ignore the correlation among costs. Experimental welfare losses in both treatments are higher than the equilibrium prediction owing to a substantial degree of productive inefficiency.

Keywords: divisible good auction, generalized winner’s curse, correlation neglect, electricity market

JEL Classification: C920, D430, L130

Suggested Citation

Bayona, Anna and Brandts, Jordi and Vives, Xavier, Supply Function Competition, Private Information, and Market Power: A Laboratory Study (July 21, 2016). CESifo Working Paper Series No. 6005. Available at SSRN: https://ssrn.com/abstract=2827545

Anna Bayona

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Jordi Brandts

Instituto de Analisis Economico (CSIC) Barcelona ( email )

UAB Campus
E-08193 Bellaterra
Spain

Xavier Vives (Contact Author)

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://wwwapp.iese.edu/faculty/facultyDetail.asp?lang=en&prof=xv

Universitat Pompeu Fabra (UPF) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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