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Does Auctioning of Entry Licences Induce Collusion? An Experimental Study

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  • Theo Offerman
  • Jan Potters

Abstract

We use experiments to examine whether the auctioning of entry rights affects the behaviour of market entrants. Standard economic arguments suggest that the licence fee paid at the auction will not affect pricing since it constitutes a sunk cost. This argument is not uncontested though, and this paper puts it to an experimental test. Our results indicate that an auction of entry licences has a significant positive effect on average prices in oligopoly but not in monopoly. These results are consistent with the conjecture that entry fees induce players to take more risk in pursuit of higher expected profits. In oligopoly, entry fees increase the probability that the market entrants coordinate on a collusive price path. In monopoly, taking more risk does not make sense since average prices are already close to the profit-maximizing price. Copyright 2006, Wiley-Blackwell.

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  • Theo Offerman & Jan Potters, 2006. "Does Auctioning of Entry Licences Induce Collusion? An Experimental Study," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 769-791.
  • Handle: RePEc:oup:restud:v:73:y:2006:i:3:p:769-791
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00395.x
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    Cited by:

    1. Jason Shachat & J. Todd Swarthout, 2013. "Auctioning the Right to Play Ultimatum Games and the Impact on Equilibrium Selection," Games, MDPI, Open Access Journal, vol. 4(4), pages 1-16, November.
    2. Mark Armstrong & Steffen Huck, 2011. "Behavioral Economics as Applied to Firms: A Primer," Antitrust Chronicle, Competition Policy International, vol. 1.
    3. Kyle Hampton & Katerina Sherstyuk, 2010. "Demand Shocks, Capacity Coordination and Industry Performance: Lessons from Economic Laboratory," Working Papers 201023, University of Hawaii at Manoa, Department of Economics.
    4. repec:eee:eecrev:v:94:y:2017:i:c:p:240-262 is not listed on IDEAS
    5. Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2005. "The Sunk Cost Bias and Managerial Pricing Practices," Levine's Bibliography 666156000000000496, UCLA Department of Economics.
    6. Daniel Friedman & Kai Pommerenke & Rajan Lukose & Garrett Milam & Bernardo Huberman, 2007. "Searching for the sunk cost fallacy," Experimental Economics, Springer;Economic Science Association, vol. 10(1), pages 79-104, March.
    7. Katerina Sherstyuk & Nina Karmanskaya & Pavel Teslia, 2016. "Bidding with money or action plans? Asset allocation under strategic uncertainty," Working Papers 201603, University of Hawaii at Manoa, Department of Economics.
    8. Gyun Cheol Gu, 2015. "Why Have U.S. Prices Become Independent of Business Cycles?," Metroeconomica, Wiley Blackwell, vol. 66(4), pages 661-685, November.
    9. Drouvelis, Michalis & Sonnemans, Joep, 2017. "The endowment effect in games," European Economic Review, Elsevier, vol. 94(C), pages 240-262.
    10. Emiel Maasland & Sander Onderstal, 2006. "Going, Going, Gone! A Swift Tour of Auction Theory and its Applications," De Economist, Springer, vol. 154(2), pages 197-249, June.
    11. repec:eee:gamebe:v:105:y:2017:i:c:p:329-348 is not listed on IDEAS
    12. Gomez-Martinez, Francisco, 2017. "Partial Cartels and Mergers with Heterogenous Firms: Experimental Evidence," EconStor Preprints 169380, ZBW - German National Library of Economics.
    13. Pedro Robalo & Rei S. Sayag, 2012. "Information at a Cost: A Lab Experiment," Tinbergen Institute Discussion Papers 12-143/VII, Tinbergen Institute.
    14. Ketel, Nadine & Linde, Jona & Oosterbeek, Hessel & van der Klaauw, Bas, 2014. "Tuition Fees as a Commitment Device," IZA Discussion Papers 7951, Institute for the Study of Labor (IZA).
    15. Buccirossi, Paolo & Spagnolo, Giancarlo, 2006. "Optimal Fines in the Era of Whistleblowers," CEPR Discussion Papers 5465, C.E.P.R. Discussion Papers.
    16. Bigoni, Maria & Fridolfsson, Sven-Olof & Le Coq, Chloe & Spagnolo, Giancarlo, 2008. "Fines, Leniency, Rewards and Organized Crime: Evidence from Antitrust Experiments," SSE/EFI Working Paper Series in Economics and Finance 698, Stockholm School of Economics.
    17. Martin G. Kocher & Stefan T. Trautmann, 2013. "Selection Into Auctions For Risky And Ambiguous Prospects," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 882-895, January.
    18. repec:wyi:journl:002215 is not listed on IDEAS
    19. Gomez-Martinez, Francisco, 2016. "Partial Cartels and Mergers with Heterogeneous Firms: Experimental Evidence," MPRA Paper 81132, University Library of Munich, Germany, revised 01 Jul 2017.
    20. Anouar El Haji & Sander Onderstal, 2015. "Trading Places: An Experimental Comparison of Reallocation Mechanisms for Priority Queuing," Tinbergen Institute Discussion Papers 15-063/VII, Tinbergen Institute.
    21. Daniel Cracau & Abdolkarim Sadrieh, 2014. "The Divergent Effects of Long-Term and Short-Term Entry Investments on Home Market Cartels," FEMM Working Papers 140003, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    22. Doğan, Gönül & van Assen, Marcel & Potters, Jan, 2013. "The effect of link costs on simple buyer–seller networks," Games and Economic Behavior, Elsevier, vol. 77(1), pages 229-246.

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