Countervailing Power in a Vertical Market Experiment

In a vertical market experiment featuring a wholesale market and a retail market we investigate the countervailing power hypothesis of Galbraith (1952). Counter to standard models of imperfect competition this hypothesis proposes that increasing concentration of retail firms might be beneficial for consumers due to the retailers’ increase in power vis-`a-vis wholesalers. We vary the number of retailers (four versus two) and the outside option wholesale price (low versus high) to implement changes in retailer power. We show that reducing the number of retailers alone is insufficient to induce a lower retail price, which supports a critical view of Galbraith’s theory