Supracompetitive Prices Research Articles

MATCHING OWN PRICES, RIVALS' PRICES OR BOTH?*

Many retailers promise that they will not be undersold by rivals and extend their promise to include their own future prices. That is, many retailers combine elements of both price‐matching guarantees and retroactive most‐favored‐customer clauses. This is puzzling because the extant literature has shown that each practice independently has the potential to facilitate supracompetitive prices, and thus one might think the two practices are substitutes. In this paper, we show that price‐matching guarantees and most‐favored‐customer clauses complement each other when offered unilaterally by a single firm and can lead to higher prices than either one could have facilitated by itself.

ABUSE OF JOINT DOMINANCE IN CANADIAN COMPETITION POLICY

The Canadian Competition Bureau has recently offered new draft guidelines on the abuse of dominance that, in the area of joint dominance, depart from the existing guidelines in two ways: first, the bureau no longer considers as a potential abuse of joint dominance the adoption of practices that facilitate supra-competitive pricing in an oligopoly; second, while in the past some form of explicit coordination was required for an assessment of joint dominance, the bureau now considers parallel abusive conduct by jointly dominant firms as potentially infringing the abuse provisions. The first change, which we attribute to case law rather than to the bureau, is undesirable. The adoption of facilitating practices can lessen competition, and is practically remediable. Facilitating practices should be considered potential abuses of joint dominance. On the other hand, the second change is sensible: oligopolists may profitably adopt exclusionary practices in parallel without coordination. Parallel exclusionary practices may lessen competition even when no single firm has a dominant market share, and this problem is amenable to a practical remedy. The bureau's new approach is welcome on this front.

Abuse of joint dominance in Canadian competition policy

The Canadian Competition Bureau has recently offered new draft guidelines on the abuse of dominance that, in the area of joint dominance, depart from the existing guidelines in two ways: first, the bureau no longer considers as a potential abuse of joint dominance the adoption of practices that facilitate supra-competitive pricing in an oligopoly; second, while in the past some form of explicit coordination was required for an assessment of joint dominance, the bureau now considers parallel abusive conduct by jointly dominant firms as potentially infringing the abuse provisions. The first change, which we attribute to case law rather than to the bureau, is undesirable. The adoption of facilitating practices can lessen competition, and is practically remediable. Facilitating practices should be considered potential abuses of joint dominance. On the other hand, the second change is sensible: oligopolists may profitably adopt exclusionary practices in parallel without coordination. Parallel exclusionary prac...

Matching Own Prices, Rivals' Prices, or Both

Many retailers promise that they will not be undersold by rivals (price-matching guarantees) and extend their promise to include their own future prices (most-favored-customer clauses). This is puzzling because the extant literature has shown that each promise independently has the potential to facilitate supracompetitive prices, and so one might think that the two promises are substitutes. In this paper, we consider why a firm might make both promises in the same guarantee, and show that price-matching guarantees and most-favored-customer clauses complement each other and can lead to higher prices than either one could have facilitated by itself.

Counterintuitive number effects in experimental oligopolies

Recent theoretical research on oligopolistic competition suggests that under certain conditions prices increase with the number of competing firms. However, this counterintuitive result is based on comparative-static analyses which neglect the importance of dynamic strategies in naturally-occurring markets. When firms compete repeatedly, supra-competitive prices can become sustainable but this is arguably more difficult when more firms operate in the market. This paper reports the results of laboratory experiments investigating pricing behavior in a setting in which (static) theory predicts the counterintuitive number effect. Under a random matching protocol, which retains much of the one-shot nature of the model, the data corroborates the game-theoretic prediction. Under fixed matching duopolists post substantially higher prices, whereas prices in quadropolies remain very similar. As a result, the predicted effect is no longer observed, and towards the end the reverse effect is observed.

Controlling market power and price spikes in electricity networks: Demand-side bidding

In this article we report an experiment that examines how demand-side bidding can discipline generators in a market for electric power. First we develop a treatment without demand-side bidding; two large firms are allocated baseload and intermediate cost generators such that either firm might unilaterally withhold the capacity of its intermediate cost generators from the market to benefit from the supracompetitive prices that would result from only selling its baseload units. In a converse treatment, ownership of some of the intermediate cost generators is transferred from each of these firms to two other firms such that no one firm could unilaterally restrict output to spawn supracompetitive prices. Having established a well controlled data set with price spikes paralleling those observed in the naturally occurring economy, we also extend the design to include demand-side bidding. We find that demand-side bidding completely neutralizes the exercise of market power and eliminates price spikes even in the presence of structural market power.

The Noisy Duopolist

Abstract This paper provides an explanation for noisy pricing based on the strategic interaction of two firms competing in prices. When a firm adds noise to its prices, undercutting it becomes harder. Therefore, noisy pricing allows a firm to either exclude a competitor while charging supracompetitive prices, or to soften competition and have both firms earn supracompetitive profits. Such behavior leads to prices lying between competitive and monopolistic levels, and harms consumers and social welfare. It occurs in equilibrium if firms set prices sequentially, and in some equilibria of a repeated game of simultaneous price-setting if one firm is patient.

Competition in the US lemon market

This paper investigates the nature of competition in the US market for fresh lemons. Empirical results indicate that market dominance on the part of Sunkist Growers, Inc. enhanced supra-competitive prices, while a change in the scheme of orderly lemon marketing did not influence competition in a noticeable manner.

The Noisy Duopolist

This paper provides an explanation for noisy pricing based on the strategic interaction of two firms competing in prices. When a firm adds noise to its prices, undercutting it becomes harder. Therefore, noisy pricing allows a firm to either exclude a competitor while charging supracompetitive prices, or to soften competition and have both firms earn supracompetitive profits. Such behavior leads to prices lying between the competitive and monopolistic levels, and harms consumers and social welfare. It occurs in equilibrium if firms set prices sequentially, and in some equilibria of a repeated game of simultaneous price-setting if one firm is patient.

Reducing Rivals Prices: Government-Supported Mavericks as New Solutions for Oligopoly Pricing

One of the most important market imperfections in modern capitalism and surprisingly one of the most under-regulated is oligopoly pricing (conscious parallelism). Only few suggestions have been made over the years to regulate oligopoly pricing. All suggestions pose serious obstacles to their efficient application. Accordingly, oligopoly pricing is not regulated. It is left to the workings of the market (or pure luck), while acknowledging the marketis limited regulatory force. This article proposes a novel method for regulating oligopoly pricing by way of introducing a government-supported maverick into an oligopolistic industry for a limited time. The maverick will price its products at competitive or near-competitive levels, based on considerations of consumer or total welfare. His rivals will follow his pricing strategy, or incur significant losses and possibly exit the market. As will be shown, the proposal may significantly reduce allocative inefficiency by reducing the welfare losses from supra-competitive pricing. The threat of intervention might be sufficient, in itself, to reduce the problem of oligopoly pricing. It may also reduce productive inefficiency by combating the problem of inefficient plant and firm sizes. This article analyzes the market conditions that must exist for this proposal to be operational and points to its benefits as well as its costs and limitations.

PRODUCT SUBSTITUTABILITY AND COMPETITION IN LONG‐DISTANCE TELECOMMUNICATIONS

I estimate the degree of substitutability between U.S. long‐distance telecommunications carriers. AT&T's Marshallian demand elasticity for basic long‐distance service is estimated to be about –10. With various assumptions regarding producer behavior, a range of residual demand elasticities, price‐cost margins, and the dead‐weight losses are calculated. I argue that producer behavior is such that the dead‐weight loss to supracompetitive pricing is likely to be about 1.5% of industry revenues. The results bear on whether AT&T's deregulation was merited and whether to allow the Bell Operating Companies to enter the long‐distance market. (JEL L13, L96, C30)

What collusion? Unilateral market power as a catalyst for countercyclical markups

This paper presents and tests a simple model of competitive and unilateral market power regimes that yields countercyclical markups. Following a decrease in demand in the short run, capacity-constrained firms may have a strong incentivenot to lower their prices to the new competitive price. Demand shocks may introduce market power into a previously competitive market. Experimental posted offer markets support this conjecture with complete information on the market structure. With only private information, there appears to be a hysteresis effect concerning supracompetitive prices, i.e., markets with a history of supracompetitive pricing continue to generate supracompetitive prices following demand shocks. However, competitive markets also remain competitive following demand shocks when firms only have private information on costs and capacities.

On the competitive effects of price-matching policies

This paper challenges the conventional wisdom that price-matching policies lead to supracompetitive prices by reducing firms' incentives to undercut rivals. I argue that price-matching and price-beating policies are more appropriately viewed as a means of price discrimination and develop a model that demonstrates their use as such. Analysis of this model shows that, in contrast to the results of the existing literature, price-matching and price-beating may raise or lower equilibrium prices relative to the equilibrium in which firms may not adopt such policies.

Market Power and Mergers in Laboratory Markets with Posted Prices

In this article, we use laboratory methods to evaluate determinants of supracompetitive pricing. The experiment involves three treatments, each with the same market supply, demand, and competitive price. In the baseline treatment, capacity is divided among five sellers so that the competitive price is a Nash equilibrium. Market power is created in a second treatment by reallocating capacity among the sellers. This market power raises observed prices in all sessions. In a third treatment, the three smallest sellers are merged in a way that holds market power constant. The consolidation has little residual effect on prices.

Bundling as a Facilitating Device: A Reinterpretation of Leverage Theory

Tying-good monopolists that extract full consumer surplus from independent sales of their tying good may, nevertheless, choose to bundle in order to induce a favorable response by their tied-market rivals. In particular, bundling may facilitate supracompetitive prices for the tied good. Copyright 1991 by The London School of Economics and Political Science.

The Exercise of Market Power in Laboratory Experiments

Previous articleNext article No AccessThe Exercise of Market Power in Laboratory ExperimentsCharles A. HoltCharles A. Holt Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by The Journal of Law and Economics Volume 32, Number 2, Part 2Oct., 1989Empirical Approaches to Market Power Sponsored by The University of Chicago Booth School of Business and The University of Chicago Law School Article DOIhttps://doi.org/10.1086/467190 Views: 5Total views on this site Citations: 34Citations are reported from Crossref Copyright 1989 The University of ChicagoPDF download Crossref reports the following articles citing this article:Despina Yiakoumi, Agathe Rouaix, Euan Phimister Evaluating capacity auction design for electricity: An experimental analysis, Energy Economics 43 (Oct 2022): 106370.https://doi.org/10.1016/j.eneco.2022.106370Isaac Otchere, Kobana Abukari Are super stock exchange mergers motivated by efficiency or market power gains?, Journal of International Financial Markets, Institutions and Money 64 (Jan 2020): 101164.https://doi.org/10.1016/j.intfin.2019.101164Andreas M. Hefti, Peiyao Shen, Regina Betz Market Power and Information Effects in a Multi-Unit Auction, SSRN Electronic Journal (Jan 2019).https://doi.org/10.2139/ssrn.3360508Erik O. Kimbrough, Andrew Smyth Testing the boundaries of the double auction: The effects of complete information and market power, Journal of Economic Behavior & Organization 150 (Jun 2018): 372–396.https://doi.org/10.1016/j.jebo.2018.01.017Vernon L. Smith Experimental Economics, (Feb 2018): 4215–4233.https://doi.org/10.1057/978-1-349-95189-5_2122Erik O. Kimbrough Testing the Boundaries of the Double Auction, SSRN Electronic Journal (Jan 2017).https://doi.org/10.2139/ssrn.2924747Noah Dormady Carbon Auctions, Energy Markets and Market Power: An Experimental Analysis, SSRN Electronic Journal (Jan 2017).https://doi.org/10.2139/ssrn.2937387Abel M. Winn, Michael L. Parente, David Porter Seller Beware: Supply and Demand Reduction and Price Manipulation in Multiple-Unit Uniform Price Auctions, Southern Economic Journal 82, no.33 (Dec 2015): 760–780.https://doi.org/10.1002/soej.12086Abel Winn, Michael Parente, David Porter Seller Beware: Supply and Demand Reduction and Price Manipulation in Multiple-Unit Uniform Price Auctions, SSRN Electronic Journal (Jan 2015).https://doi.org/10.2139/ssrn.2560064Raluca Parvulescu, Nicolas Vaneecloo Concurrence et expérimentations de marché, un débat clos ? Un état des lieux pour un nouveau programme de recherche, Revue d'économie politique Vol. 124, no.33 (Jul 2014): 317–360.https://doi.org/10.3917/redp.243.0317Noah C. Dormady Carbon auctions, energy markets & market power: An experimental analysis, Energy Economics 44 (Jul 2014): 468–482.https://doi.org/10.1016/j.eneco.2014.03.013Noah C. Dormady Market power in cap-and-trade auctions: A Monte Carlo approach, Energy Policy 62 (Nov 2013): 788–797.https://doi.org/10.1016/j.enpol.2013.06.022John Duffy, Alexander Matros, Ted Temzelides Competitive behavior in market games: Evidence and theory, Journal of Economic Theory 146, no.44 (Jul 2011): 1437–1463.https://doi.org/10.1016/j.jet.2011.05.013Vernon L. Smith experimental economics, (Jan 2010): 75–98.https://doi.org/10.1057/9780230280786_12Daniela Puzzello Tie-breaking rules and divisibility in experimental duopoly markets, Journal of Economic Behavior & Organization 67, no.11 (Jul 2008): 164–179.https://doi.org/10.1016/j.jebo.2006.09.002Douglas D. Davis, Bart J. Wilson Strategic buyers, horizontal mergers and synergies: An experimental investigation, International Journal of Industrial Organization 26, no.33 (May 2008): 643–661.https://doi.org/10.1016/j.ijindorg.2006.12.004Douglas D. Davis, Bart J. Wilson Chapter 7 Mixed Strategy Nash Equilibrium Predictions as a Means of Organizing Behavior in Posted-Offer Market Experiments, (Jan 2008): 62–70.https://doi.org/10.1016/S1574-0722(07)00007-8Douglas D. Davis, Charles A. Holt Chapter 17 The Exercise of Market Power in Laboratory Experiments, (Jan 2008): 138–145.https://doi.org/10.1016/S1574-0722(07)00017-0Vernon L. Smith Experimental Economics, (Dec 2016): 1–19.https://doi.org/10.1057/978-1-349-95121-5_2122-1Lynne Kiesling, Bart J. Wilson An experimental analysis of the effects of automated mitigation procedures on investment and prices in wholesale electricity markets, Journal of Regulatory Economics 31, no.33 (Feb 2007): 313–334.https://doi.org/10.1007/s11149-006-9018-4L. Lynne Kiesling, Bart J. Wilson An Experimental Analysis of the Effects of Automated Mitigation Procedures on Investment and Prices in Wholesale Electricity Markets, SSRN Electronic Journal (Jan 2005).https://doi.org/10.2139/ssrn.733404STEVE BUCHHEIT Fixed Cost Magnitude, Fixed Cost Reporting Format, and Competitive Pricing Decisions: Some Experimental Evidence*, Contemporary Accounting Research 21, no.11 (Jan 2010): 1–24.https://doi.org/10.1506/NBX3-EF5Q-4JMU-84DEStephen J. Rassenti, Vernon L. Smith, Bart J. Wilson Controlling market power and price spikes in electricity networks: Demand-side bidding, Proceedings of the National Academy of Sciences 100, no.55 (Feb 2003): 2998–3003.https://doi.org/10.1073/pnas.0437942100Steve Buchheit Fixed Cost Magnitude, Fixed Cost Reporting Format, and Competitive Pricing Decisions: Some Experimental Evidence, SSRN Electronic Journal (Jan 2003).https://doi.org/10.2139/ssrn.464920Jim Engle-Warnick, Bradley J. Ruffle Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets, SSRN Electronic Journal (Jan 2002).https://doi.org/10.2139/ssrn.310339Ulf G. Marks, Sönke Albers Experiments in Competitive Product Positioning: Actual Behavior Compared to Nash Solutions, Schmalenbach Business Review 53, no.33 (Nov 2017): 150–174.https://doi.org/10.1007/BF03396633Douglas D. Davis, Bart J. Wilson Firm-specific cost savings and market power, (Jan 2001): 49–69.https://doi.org/10.1007/978-3-642-56448-2_4Vernon L. Smith Rationality in Economics, 86 (May 2010).https://doi.org/10.1017/CBO9780511754364Bart J. Wilson What collusion? Unilateral market power as a catalyst for countercyclical markups, Experimental Economics 1, no.22 (Sep 1998): 133–145.https://doi.org/10.1007/BF01669299Douglas D. Davis, K. Ramagopal Demand shocks, advance production and market power: some lessons about markets from the laboratory, Managerial and Decision Economics 19, no.4-54-5 (Dec 1998): 205–223.https://doi.org/10.1002/(SICI)1099-1468(199806/08)19:4/5<205::AID-MDE887>3.0.CO;2-#Bart J. Wilson , Experimental Economics 1, no.22 (Jan 1998): 133–145.https://doi.org/10.1023/A:1009972125288Douglas D. Davis, Charles A. Holt List prices and discounts: The interrelationship between consumer shopping patterns and profitable marketing strategies, Psychology and Marketing 13, no.44 (Jul 1996): 341–363.https://doi.org/10.1002/(SICI)1520-6793(199607)13:4<341::AID-MAR2>3.0.CO;2-ADavid A. Butz Most-Favored Treatment Provisions as Nondiscrimination Guarantees, International Journal of the Economics of Business 2, no.11 (May 2011): 65–86.https://doi.org/10.1080/758521097S.J. Rassenti, V.L. Smith, B.J. Wilson Structural features that contribute to market power in electric power networks: some preliminary results, (): 6.https://doi.org/10.1109/HICSS.2000.926761

Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests

The existence of imperfect information is thought to provide firms with incentives to degrade contract quality by supplying terms that well-informed consumers would refuse. We show, in contrast, that these incentives are weaker than is commonly supposed; rather, when consumers gather relatively little information, the profit maximizing strategy for firms is likely to involve offering the contract terms that consumers prefer, but at supracompetitive prices. In consequence, a standard state response to imperfect information problems, regulating the substantive terms of transactions, is often misplaced. When imperfect information exists, the state instead should reduce the costs to consumers of comparison shopping for contract terms, because such shopping reduces prices and also reduces further the incentive of firms to degrade contract quality.

Warranty markets and public policy

Search equilibrium models in the Economics of Information concern themselves exclusively with consumer ignorance of the prices that different firms charge. Legal regulation dealing with information, on the other hand, concerns itself primarily with contact terms. In particular, firms are often required to warrant against product related defects on the supposed ground that firms respond to consumer ignorance only by degrading contract quality. This paper is the beginning of an attempt to make the Economics of Information useful to policymakers. It models a market for warranties under imperfect information and shows that firms are more likely to respond to consumer ignorance by raising prices for the warranties that consumers prefer rather than deleting warranties from consumer contracts. Hence, policymakers should be concerned more with reducing supracompetitive prices than with “improving” contract quality.