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Monopoly Behavior, Decentralized Regulation, and Contestable Markets: An Experimental Evaluation

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  • Glenn W. Harrison
  • Michael McKee

Abstract

This study provides a comparative experimental evaluation of several alternative approaches to the (single-product) monopoly problem. We contrast incentive-compatible decentralized regulatory mechanisms with notions of market contestability in a decreasing-cost environment. The decentralized regulatory mechanisms are found to be significantly more effective at restraining monopoly power than is allowing direct contestability. But the regulatory mechanisms examined require that the regulatory agency know the market demand curve (though not the industry cost curve). Since this is significantly more information than is required to implement direct contestability, an interesting tradeoff is suggested: does the greater efficiency in monopoly restraint provided by the regulatory mechanism relative to direct contestability outweigh the former's greater informational requirements?

Suggested Citation

  • Glenn W. Harrison & Michael McKee, 1985. "Monopoly Behavior, Decentralized Regulation, and Contestable Markets: An Experimental Evaluation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 51-69, Spring.
    • Handle: RePEc:rje:randje:v:16:y:1985:i:spring:p:51-69
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    Cited by:

    1. van Damme, E.E.C. & Larouche, P. & Müller, W., 2006. "Abuse of a Dominant Position : Cases and Experiments," Discussion Paper 2006-020, Tilburg University, Tilburg Law and Economic Center.
    2. Yan, Huibin & Friedman, Daniel, 2008. "An Experiment on the Core∗," Santa Cruz Department of Economics, Working Paper Series qt0jq48184, Department of Economics, UC Santa Cruz.
    3. 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.
    4. Utteeyo Dasgupta, 2009. "Potential competition in the presence of sunk entry costs: an experiment," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(2), pages 203-225.
    5. Switgard Feuerstein, 2005. "Collusion in Industrial Economics—A Survey," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 163-198, December.
    6. Dasgupta Utteeyo, 2011. "Are Entry Threats Always Credible?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-41, December.
    7. Nicolaus Tideman & Florenz Plassmann, 2017. "Efficient collective decision-making, marginal cost pricing, and quadratic voting," Public Choice, Springer, vol. 172(1), pages 45-73, July.
    8. March, Christoph, 2019. "The behavioral economics of artificial intelligence: Lessons from experiments with computer players," BERG Working Paper Series 154, Bamberg University, Bamberg Economic Research Group.
    9. Kritikos, Alexander & Bolle, Friedel, 2004. "Punishment as a public good. When should monopolists care about a consumer boycott?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 355-372, June.
    10. Jamie Brown-Kruse & Steven R Elliot & Rob Godby, 1995. "Strategic Manipulation of Pollution Permit Markets: An Experimental Approach," Department of Economics Working Papers 1995-03, McMaster University.
    11. March, Christoph, 2021. "Strategic interactions between humans and artificial intelligence: Lessons from experiments with computer players," Journal of Economic Psychology, Elsevier, vol. 87(C).
    12. Sherman, Roger, 1989. "Institutional design for monopoly regulation," European Journal of Political Economy, Elsevier, vol. 5(2-3), pages 245-257.
    13. Beckman & Gregory DeAngelo & Smith, 2015. "Dictator monopolies and essential goods: experimental evidence," Applied Economics, Taylor & Francis Journals, vol. 47(59), pages 6461-6478, December.
    14. Kelly, Frank S., 1995. "Laboratory subjects as multiproduct monopoly firms: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 401-420, August.
    15. Durham, Yvonne, 2000. "An experimental examination of double marginalization and vertical relationships," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 207-229, June.
    16. Yan, Huibin & Friedman, Daniel & Munro, David, 2016. "An experiment on a core controversy," Games and Economic Behavior, Elsevier, vol. 96(C), pages 132-144.
    17. Pfeffer, Jonas & Huckenbeck, Jan, 2020. "Regulating Monopolies - A Case Example of Google," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 201-210.

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