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Communication in vertical markets: Experimental evidence

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  • Moellers, Claudia
  • Normann, Hans-Theo
  • Snyder, Christopher M.

Abstract

An upstream monopolist supplying competing downstream firms may fail to monopolize the market because it is unable to commit not to behave opportunistically. We build on previous experimental studies of this well-known commitment problem by introducing communication. Allowing the upstream firm to chat privately with each downstream firm reduces total offered quantity from near the Cournot level (observed in the absence of communication) halfway toward the monopoly level. Allowing all firms to chat together openly results in complete monopolization. Downstream firms obtain such a bargaining advantage from open communication that all of the gains from monopolizing the market accrue to them. A simple structural model of Nash-in-Nash bargaining fits the pattern of shifting surpluses well. Using third-party coders, unsupervised text mining, among other approaches, we uncover features of the rich chat data that are correlated with market outcomes. We conclude with a discussion of the antitrust implications of open communication in vertical markets.

Suggested Citation

  • Moellers, Claudia & Normann, Hans-Theo & Snyder, Christopher M., 2017. "Communication in vertical markets: Experimental evidence," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 214-258.
  • Handle: RePEc:eee:indorg:v:50:y:2017:i:c:p:214-258
    DOI: 10.1016/j.ijindorg.2016.10.002
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    Cited by:

    1. Fourberg, Niklas, 2017. "Let's lock them in: Collusion under Consumer Switching Costs," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168097, Verein für Socialpolitik / German Economic Association.
    2. Bonnet, Céline & Schain, Jan Philip, 2017. "An empirical analysis of mergers: Efficiency gains and impact on consumer prices," DICE Discussion Papers 244, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    4. Güth, Werner & Stadler, Manfred & Zaby, Alexandra, 2018. "Capacity precommitment, communication, and collusive pricing: Theoretical benchmark and experimental evidence," University of Tübingen Working Papers in Business and Economics 114, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    5. Fourberg, Niklas, 2018. "Let's lock them in: Collusion under consumer switching costs," DICE Discussion Papers 296, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Fischer, Christian & Normann, Hans-Theo, 2019. "Collusion and bargaining in asymmetric Cournot duopoly—An experiment," European Economic Review, Elsevier, vol. 111(C), pages 360-379.
    7. repec:eee:gamebe:v:107:y:2018:i:c:p:93-108 is not listed on IDEAS
    8. Lauton, Felix & Rothkopf, Alexander & Pibernik, Richard, 2019. "The value of entrant manufacturers: A study of competition and risk for donor-funded procurement of essential medicines," European Journal of Operational Research, Elsevier, vol. 272(1), pages 292-312.

    More about this item

    Keywords

    Commitment; Communication; Experiments; Vertical restraints;

    JEL classification:

    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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