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

66 Pages Posted: 18 Apr 2017

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: March 18, 2017

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. 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

Bayona, Anna and Brandts, Jordi and Vives, Xavier, Supply Function Competition, Private Information, and Market Power: A Laboratory Study (March 18, 2017). ESADE Business School Research Paper No. 263. Available at SSRN: https://ssrn.com/abstract=2954514 or http://dx.doi.org/10.2139/ssrn.2954514

Anna Bayona (Contact Author)

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

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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