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


  • Glenn W. Harrison
  • Michael McKee


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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    References listed on IDEAS

    1. Kenneth L. Judd, 2003. "Closed-loop equilibrium in a multi-stage innovation race," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 673-695, March.
    2. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-293, June.
    3. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 429-436.
    4. Christopher Harris & John Vickers, 1985. "Perfect Equilibrium in a Model of a Race," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 193-209.
    5. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
    6. Robert E. Lucas, Jr., 1971. "Optimal Management of a Research and Development Project," Management Science, INFORMS, vol. 17(11), pages 679-697, July.
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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. 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.
    6. repec:kap:pubcho:v:172:y:2017:i:1:d:10.1007_s11127-017-0411-6 is not listed on IDEAS
    7. 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.
    8. 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.
    9. Sherman, Roger, 1989. "Institutional design for monopoly regulation," European Journal of Political Economy, Elsevier, vol. 5(2-3), pages 245-257.
    10. 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.
    11. Yan, Huibin & Friedman, Daniel & Munro, David, 2016. "An experiment on a core controversy," Games and Economic Behavior, Elsevier, vol. 96(C), pages 132-144.

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