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Price-setting Power versus Private Information

Author

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  • Randolph Sloof

    (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

Abstract

This paper investigates the extent of the holdup underinvestment problem in a buyer-seller relationship in which the seller has private information about his alternative trading opportunities. Theory predicts that, compared with a situation in which outside options are publicly observed, the seller obtains an informational rent while the buyer bears an informational loss. As a result the seller is predicted to invest more while the buyer is expected to invest less. In contrast to these predictions, private information appears to have no impact on the investment levels observed in the experiment. A second main finding is that investments do increase with the price-setting power of the investor. Overall the results question some recent theoretical suggestions that private information rents might substitute for price-setting power in mitigating holdup. This discussion paper resulted in a publication in the 'European Economic Review' (2008). Volume 52(3), pages 469-486.

Suggested Citation

  • Randolph Sloof, 2003. "Price-setting Power versus Private Information," Tinbergen Institute Discussion Papers 03-099/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20030099
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    References listed on IDEAS

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    More about this item

    Keywords

    holdup; private information; outside options; experiments;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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