Discussion Paper Details

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Title: Information Frictions and Market Power: A Laboratory Study

Author(s): Anna Bayona, Jordi Brandts and Xavier Vives

Publication Date: July 2016

Keyword(s): private information, Supply function competition and wholesale electricity market

Programme Area(s): Industrial Organization

Abstract: In a laboratory experiment with supply function competition and private information about correlated costs we study whether cost interdependence leads to greater market power in relation to when costs are uncorrelated in the ways predicted by Bayesian supply function equilibrium. We find that with uncorrelated costs observed behavior is close to the theoretical benchmark. However, with interdependent costs and precise private signals, market power does not raise above the case of uncorrelated costs contrary to the theoretical prediction. This is consistent with subjects not being able to make inferences from the market price when costs are interdependent. We find that this effect is less severe when private signals are noisier.

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Bibliographic Reference

Bayona, A, Brandts, J and Vives, X. 2016. 'Information Frictions and Market Power: A Laboratory Study'. London, Centre for Economic Policy Research.