Price-setting Power versus Private Information

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Price-setting Power versus Private Information

Author Info

Randolph Sloof () (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

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Randolph Sloof

Abstract

This paper investigates the extent of the holdup underinvestment problem in a buyer-seller relationship in which the seller has private information about his alternative trading opportunities. Theory predicts that, compared with a situation in which outside options are publicly observed, the seller obtains an informational rent while the buyer bears an informational loss. As a result the seller is predicted to invest more while the buyer is expected to invest less. In contrast to these predictions, private information appears to have no impact on the investment levels observed in the experiment. A second main finding is that investments do increase with the price-setting power of the investor. Overall the results question some recent theoretical suggestions that private information rents might substitute for price-setting power in mitigating holdup.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-099/1.

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Date of creation: 09 Dec 2003
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Handle: RePEc:dgr:uvatin:20030099

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-08-23 (All new papers)
NEP-COM-2004-04-25 (Industrial Competition)
NEP-EXP-2004-08-23 (Experimental Economics)
NEP-MIC-2004-08-23 (Microeconomics)

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Other versions:
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Other versions:
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Other versions:
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