Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets

Although much research has been devoted to the impact of seller structure on market outcomes, considerably less is known about the influence of buyer structure. We examine the impact of buyer concentration on the pricing of a monopolist. Markets with both two and four buyers achieve prices well below the monopoly price, attaining even competitive levels - sometimes even lower. Moreover, markets with only two buyers show significantly lower prices than those with four buyers. We design an additional pair of treatments to pinpoint the source of this difference. We attribute the lower prices in the two-buyer treatment to the monopolist pricing more cautiously when there are fewer buyers in order to avoid costly losses in sales. Buyer concentration is thus an effective source of countervailing power: even an unregulated monopolist that faces no possible threat of entry may price competitively