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

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Abstract

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.

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  • Jim Engle-Warnick & Bradley Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Papers 2002-W14, Economics Group, Nuffield College, University of Oxford.
    • Handle: RePEc:nuf:econwp:0214
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    1. Hans-Theo Normann & Bradley J. Ruffle & Christopher M. Snyder, 2007. "Do buyer-size discounts depend on the curvature of the surplus function? Experimental tests of bargaining models," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 747-767, September.
    2. Davis, Douglas D. & Wilson, Bart J., 2008. "Strategic buyers, horizontal mergers and synergies: An experimental investigation," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 643-661, May.
    3. Baldursson, Fridrik M. & Johannesson, Sigurdur, 2005. "Kaupendamáttur á sementsmarkaði [Buyer power in the cement industry]," MPRA Paper 14742, University Library of Munich, Germany.
    4. Productivity Commission, 2005. "Review of Part X of the Trade Practices Act 1974: International Liner Cargo Shipping," Inquiry Reports, Productivity Commission, Government of Australia, number 32, July.

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    More about this item

    Keywords

    strategic buyer behavior; buyer concentration; monopoly; experimental economics;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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