Chapter 17 The Exercise of Market Power in Laboratory Experiments

Many aspects of antitrust policy are influenced by the possibility that sellers in concentrated markets may have the power to raise prices above competitive levels. Of course, anyone can raise prices, so the issue is whether a change in structure, e.g., a merger, will allow one or more sellers to raise price profitably. A price increase by one seller diverts sales to others, so a firm is more likely to have market power when its competitors have limited capacity to expand their sales. Thus a merger that reduces competitors' capacity may create market power. Market power can also be sensitive to the trading institution, and this is the context that power issues first arose in experimental economics. Relatively high prices in posted-offer auctions are not surprising, since experimental economists have long noticed that prices in such markets tend to be above competitive levels, and will converge from above if they converge at all.