Supply Function Competition, Private Information, and Market Power: A Laboratory Study
66 Pages Posted: 18 Apr 2017
Date Written: March 18, 2017
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. Even though we do not ﬁnd evidence of greater market power on average, experimental welfare losses are higher than the equilibrium prediction owing to a substantial degree of productive ineﬃciency.
Keywords: divisible good auction, generalised winner’s curse, correlation neglect, electricity market
JEL Classification: C92, D43, L13
Suggested Citation: Suggested Citation