ADVANCE PRODUCTION,INVENTORIES, AND MARKET POWER: AN EXPERIMENTAL INVESTIGATION

We report an experiment that assesses the effects of alterations in production conditions and product durability on market power in Bertrand‐Edgeworth duopolies. Static equilibrium analysis predicts that advance (rather than “to demand”) production raises prices, but does not affect profits. The further addition of a simple inventory option causes prices to fall and seller earnings to increase. Contrary to these predictions, we observe similar prices in baseline and advance production treatments, but lower profits given advance production. An inventory option reduces both prices and earnings. Results are driven by the treatments' effects on sellers' capacities to tacitly collude. (JEL C9, D4, L4)