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Contestability in the Presence of an Alternate Market: An Experimental Examination


  • Jamie L. Brown-Kruse


Most earlier experimental tests of the contestable market hypothesis assume a zero opportunity cost of entry. This design feature makes interpretation of results in terms of entry behavior problematic. The experimental study that I report tests contestability with the addition of an alternative market that yields a positive profit with certainty. This safe haven operationalizes a positive opportunity cost of entry. Hit-and-run entry is observed in the experiments. Adjusted mean prices are not significantly different from the zero opportunity cost case. Two methodological questions are also examined. In one treatment, sellers' price offers are allowed only in $0.25 increments. The simplification of the sellers' decision space makes collusive arrangements more probable. Secondly, market outcomes using human subject buyers are compared with outcomes from experiments with computer-simulated demand. The disciplining effect of human subject buyers results in market prices that converge to competitive levels more quickly.

Suggested Citation

  • Jamie L. Brown-Kruse, 1991. "Contestability in the Presence of an Alternate Market: An Experimental Examination," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 136-147, Spring.
  • Handle: RePEc:rje:randje:v:22:y:1991:i:spring:p:136-147

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    References listed on IDEAS

    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    3. Aumann, Robert J, 1987. "Correlated Equilibrium as an Expression of Bayesian Rationality," Econometrica, Econometric Society, vol. 55(1), pages 1-18, January.
    4. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
    5. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-554, May.
    6. Lawrence Ausubel & Raymond Deneckere, 1985. "One is Almost Enough for Monopoly," Discussion Papers 669, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
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    Cited by:

    1. Bradley J. Ruffle, 2005. "Buyer Countervailing Power: A Survey of Experimental Evidence," Working Papers 0512, Ben-Gurion University of the Negev, Department of Economics.
    2. 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.
    3. Vernon L. Smith, 1994. "Economics in the Laboratory," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 113-131, Winter.
    4. Duffy, John, 2006. "Agent-Based Models and Human Subject Experiments," Handbook of Computational Economics,in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 19, pages 949-1011 Elsevier.

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