DP11378 Information Frictions and Market Power: A Laboratory Study

Author(s): Anna Bayona, Jordi Brandts, Xavier Vives
Publication Date: July 2016
Date Revised: May 2020
Keyword(s): private information, Supply function competition, wholesale electricity market
JEL(s): C92, D43, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11378

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.