TRANSACTION COST, TWO-PART TARIFFS, AND COLLUSION

When two goods exhibit demand complementarity, the sellers would generally charge lower prices under collusion than under rivalry–a cartel internalizes cross effects that independent firms ignore. For the particular case of "two-part" tariffs consisting of entrance fees and per-unit prices, this paper shows that entrance fees are indeed lower under collusion than under rivalry, but that per-unit prices are unaffected. The demand complementarity arises from transaction costs borne by consumers who enter the market. The policy implication is that collusion can be socially preferable to competition in the presence of such transaction costs.     

A LABORATORY STUDY OF DUOPOLY PRICE COMPETITION WITH PATIENT BUYERS

This article reports a duopoly experiment in which sellers compete to sell to a potentially patient buyer. Each period sellers simultaneously post prices and the buyer costlessly observes either one or both prices. The buyer can then either accept an observed price or reject all offers. Following a rejection, sellers may have an opportunity to post prices again in another round. We study how the duopolists' pricing behavior responds to changes in the likelihood of the buyer observing multiple prices, γ, and the probability of continuing to another round, δ. The unique stationary equilibrium features mixed strategies. Consistent with the equilibrium, observed prices are decreasing in γ and δ. Contrary to the equilibrium, however, buyers sometimes reject profitable price offers, and average prices are lower than predicted when only one round of offers is possible and higher than predicted in the multiple‐round game. (JEL D43, D83, L13)     

A GUIDE TO THE PITFALLS OF IDENTIFYING PRICE DISCRIMINATION

This paper demonstrates that plausible cost-based explanations exist for what are commonly perceived to be cases of price discrimination. We explain such commonly discussed problems as the price spreads of retail gasoline products, the "high" price of dinners at restaurants, the "high" price of popcorn at movie theaters, and the fact that airline ticket prices vary with how long the ticket is purchased before the flight's departure. Our explanations benefit from not relying on consumer ignorance or implicit collusion among numerous sellers.     

PROCUREMENT AUCTIONS WITH RENEGOTIATION AND WEALTH CONSTRAINTS

Renegotiation is a common practice in procurement auctions which allows for postauction price adjustments and is nominally intended to deal with the problem that sellers might underestimate the eventual costs of a project during the auction. Using a combination of theory and experiments, we examine the effectiveness of renegotiation at solving this problem. Our findings demonstrate that renegotiation is rarely successful at solving the problem of sellers misestimating costs. The primary effect of allowing renegotiation is that it advantages sellers who possess a credible commitment of default should they have underbid the project. Renegotiation allows these weaker types of sellers to win more often and it also allows them to leverage their commitment of default into higher prices in renegotiation from a buyer. (JEL C91, D44, D82)     

COLLUSION FACILITATING AND COLLUSION BREAKING POWER OF SIMULTANEOUS ASCENDING AND DESCENDING PRICE AUCTIONS

This article demonstrates that a robust tacit collusion evolves quickly in a "collusion incubator" environment but is destroyed by the simultaneous descending price auction. Theories of collusion-producing behavior, along with the detail of the states on which strategies are conditioned, lead to a deeper understanding of how tacit collusion evolves and its necessary conditions. These theories explain how the descending price auction destroys the collusion. The experiments proceed by conducting simultaneous ascending price auctions in the collusion incubator. Then, once the tacit collusion developed, changing to the descending auction. The change moved prices from collusive levels to near-competitive levels. ( JEL C71, C92, D43, D44)     

CONSUMER SEARCH COSTS AND MARKET PERFORMANCE

We conduct laboratory markets to evaluate the effects of consumer search costs on market performance. The primary research goal is to assess the behavioral relevance of Diamond's [1971] paradoxical conclusion that the injection of a small consumer search cost alters the equilibrium price prediction from competitive to monopoly levels. Although monopoly prices are not consistently observed, we find that search costs do tend to raise prices. Additional experimentation indicates that below-monopoly prices are not explained by buyer avoidance of high-pricing sellers, but that prices increase as search costs are raised.     

TACIT COLLUSION IN AUCTIONS AND CONDITIONS FOR ITS FACILITATION AND PREVENTION: EQUILIBRIUM SELECTION IN LABORATORY EXPERIMENTAL MARKETS

The paper studies bidder behavior in simultaneous, continuous, ascending price auctions. We design and implement a "collusion incubator" environment based on a type of public, symmetrically "folded" and "item-aligned" preferences. Tacit collusion develops quickly and reliably within the environment. Once tacit collusion developed, it proved remarkably robust to institutional changes that weakened it as an equilibrium of a game-theoretic model. The only successful remedy was a non-public change in the preference of participants that destroyed the symmetrically, "folded" and "item aligned" patterns of preferences, creating head-to-head competition between two agents reminiscent of the concept of a "maverick." ( JEL L50, L94, D43)     

THE HAYEK HYPOTHESIS IN EXPERIMENTAL AUCTIONS: INSTITUTIONAL EFFECTS AND MARKET POWER

We report twelve market experiments utilizing a "seller market power" supply and demand structure where two of five sellers can unilaterally increase their profit by withholding supply. The data indicate that both the double auction and posted offer institutions result in traders extracting the bulk of the potential gains from exchange in the market; however, prices generally occur above the competitive equilibrium prediction. Market power in the form of strategic supply withholding does not appear to be responsible for the supra-competitive prices.     

BUYERS' STRATEGIES, ENTRY BARRIERS, and COMPETITION

In markets where sellers have customer-specific investments, and buyers can make credible, but costly, commitments to switch suppliers, buyers' strategies attenuate the market power of sellers. Furthermore, since current prices and a buyer's decision to switch suppliers are related, limit pricing becomes an equilibrium. Limit prices increase with the time it takes a buyer to switch suppliers, and with buyers' switching costs, but fall with the level of sunk investments. Thus, sunk investments may restrain the sellers' ability to exert market power. The paper questions, then, the standard inverse relationship between market performance and sunk investments.     

COOPERATION SPILLOVERS AND PRICE COMPETITION IN EXPERIMENTAL MARKETS

Firms often cooperate explicitly through activities such as research joint ventures, while competing in other markets. Cooperation in research and development can allow firms to internalize the external benefits of knowledge creation and increase the returns from research and development (R&D) expenditures. Such cooperation may spill over to facilitate collusion in the market, however, potentially lowering welfare and efficiency. This paper uses a laboratory experiment to examine if sellers successfully coordinate to fund a joint research project to reduce their costs, and how this collaboration affects their pricing behavior. The experiment includes control treatments with separate R&D cooperation and markets. Our results show that although participants usually cooperate when given an opportunity, cooperation is observed less frequently when they also compete in the market. Communication improves cooperation in all environments, particularly when the market is present. Nevertheless, the data provide no evidence of seller collusion in the market. (JEL D43, D71, H40, O3)     

INFORMATION SHARING AND TACIT COLLUSION IN LABORATORY DUOPOLY MARKETS

This paper reports 45 laboratory duopoly markets that examine the importance of information sharing in facilitating tacit collusion under conditions of demand uncertainty. Sellers in these repeated laboratory markets generally shared information when possible to reduce their demand uncertainty, which led to output reductions in some demand states. Risk aversion is a likely explanation for this sharing, but some sellers also appeared to employ a strategy of information concealment to punish non-colluding rivals. Nevertheless, output choices were similar in control treatments that forced sellers to share or conceal information, so the information sharing itself did not substantially increase tacit collusion. ( JEL C92, D80, L13)     

GAME THEORY FOR PLAYING GAMES: SOPHISTICATION IN A NEGATIVE-EXTERNALITY EXPERIMENT

We explore the extent to which the lack of Nash payoff maximization in experimental games is attributable to the "sophistication" of participants (i.e., their understanding of strategic decision making and profit-maximizing decisions). To this end, we compare the behaviors of sophisticated participants (i.e., those who have been exposed to the concepts of game theory) against those of a more standard subject pool in a moral hazard environment. Results suggest that sophisticated subjects are significantly more likely to adopt strategies predicted by standard theory and arrive at a Nash equilibrium. ( JEL C72, C91, C92, D63, D64)     

TRACKING CUSTOMER SEARCH TO PRICE DISCRIMINATE

The electronic technologies of the Internet make it possible for sellers to track potential customers and discriminate between the informed and uninformed. In this article, we report an experiment that investigates the market impact of firms tracking customers and offering discriminatory prices based on search history. We find that consumers, on average, face the same prices when sellers have the ability to track customers and price discriminate as when sellers post a single price for all buyers. However, informed buyers receive lower prices when sellers can detect buyer search, whereas uninformed buyers receive lower prices when firms cannot track customers. (JEL D43 , L13 , C92 )     

COLLUSION AND OVERLENDING

This study provides a theoretical background for collusion-induced overlending being the main cause of the 1997 Korean financial crisis. Our model consists of a lending institution, a borrowing chaebol of an unknown type, and an informed politician who can influence lending decision. We show that collusion can be formed between a low-type chaebol and the politician, and it may not be the lending institution's best interest to deter such collusion. This equilibrium, however, is possible only when the economic environment is favorable. When the economy deteriorates, the expectations of the fall of the collusion equilibrium can trigger financial crisis. (JEL G30, D82, O16)     

Automated Pricing Rules in Electronic Posted Offer Markets

Internet markets are heralded as enhancing efficiency by providing buyers and sellers with an abundance of information. In these electronic markets, firms have the opportunity to employ "pricebots," computerized algorithms that automatically adjust prices to prevailing market conditions. This article uses laboratory methods to examine the potential market impact of the endogenous selection of three automated pricing algorithms: undercutting, low-price matching, and trigger pricing. We find that the undercutting algorithm leads to prices similar to the game-theoretic prediction. Low-price matching generates significantly higher prices, and trigger pricing results in market prices below the game-theoretic prediction.     

Games of school choice under the Boston mechanism with general priority structures

The Boston mechanism is a centralized student assignment mechanism used in many school districts in the US. We investigate strategic behavior of students under the Boston mechanism when schools may have complex priority structures. We show that a stable matching is supported as an outcome of a Nash equilibrium under a general environment. We further show that any outcome of a Nash equilibrium is a stable matching when the school priorities are substitutable.     

MARKET POWER IN ORAL DOUBLE AUCTIONS

This paper reports the results of a series of oral-double-auction experiments in which some traders possess market power. A market is set up in which the configuration of the supply and demand curves leads to an asymmetry between buyers and sellers in their abilities to influence transactions prices. This market structure does not always lead to convergence to the competitive equilibrium price despite the competitive nature of the oral-double-auction institution. The nonconvergence occurs most frequently in the experiments involving experienced subjects.     

Price Competition in Pharmaceuticals: The Case of Anti-infectives

A fundamental question in industrial organization regards the relationship between price and the number of sellers. This relationship has been particularly important in the pharmaceutical industry where legislative changes were specifically designed to foster competition. Previous research on the pharmaceutical industry has shown generic entry has a mixed impact; generic prices fall rapidly with generic entry, whereas branded prices tend to increase or decrease only slightly. Using more complete data, focused on one segment of the pharmaceutical industry—anti-infectives—we find that the relationship between pharmaceutical prices and the number of sellers is more like that found in other industries. (JEL L11 , L65 , D4 )     

Representation of effectivity functions in coalition proof Nash equilibrium: A complete characterization

The concept of coalition proof Nash equilibrium was introduced by Bernheim et al. [5]. In the present paper, we consider the representation problem for coalition proof Nash equilibrium: For a given effectivity function, describing the power structure or the system of rights of coalitions in society, it is investigated whether there is a game form which gives rise to this effectivity function and which is such that for any preference assignment, there is a coalition proof Nash equilibrium.  It is shown that the effectivity functions which can be represented in coalition proof Nash equilibrium are exactly those which satisfy the well-known properties of maximality and superadditivity. As a corollary of the result, we obtain necessary conditions for implementation of a social choice correspondence in coalition proof Nash equilibrium which can be formulated in terms of the associated effectivity function. Received: 24 June 1999/Accepted: 20 September 2000     

AN EXPERIMENT ON INNOVATION AND COLLUSION

This paper examines the relationship between product innovation and the success of price collusion using novel laboratory experiments. Average market prices in low innovation (LO) experiments are significantly higher than those in high innovation, but otherwise identical experiments. This price difference is attributed to LO experimental subjects' greater common market experience. The data illustrate how collusion can be perceived as the “only way to make it” in LO markets where product innovation is not a viable strategy for increasing profits. They suggest that product homogeneity can be a proximate cause, and product innovation an ultimate cause, of collusion. (JEL L41, L10, C92)