An experiment on strategic capacity reduction
A firm may strategically decrease capacity to gain bargaining power over its suppliers. Equilibrium models of competition imply that the incentive to reduce capacity to gain buyer power is small because the buyer captures all available surplus by excluding even a single supplier. However, these models can rest on behaviorally untenable actions prescribed to suppliers in equilibrium. In this paper, we test this theory using a laboratory experiment in which subjects compete to supply a single firm. We find that as capacity decreases, so do suppliers’ price requests, but according to a pattern quite different from equilibrium predictions. We find that a buyer has incentive to exclude at least 30% of available suppliers. This result calls for greater antitrust oversight and offers a behavioral explanation for observed reductions in capacity. JEL Classification: C78, C90, L13 Key words: Strategic capacity reduction, Bargaining power, Ultimatum games, Behavioral economics
|Date of creation:||Jul 2008|
|Date of revision:|
|Contact details of provider:|| Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063|
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mikhael Shor, 2009. "Procedural Justice in Simple Bargaining Games," Working papers 2012-25, University of Connecticut, Department of Economics.
- Hans-Theo Normann & Bradley J. Ruffle & Christopher M. Sndyer, 2003.
"Do Buyer-Size Discounts Depend on the Curvature of the Surplus Function? Experimental Tests of Bargaining Models,"
- Hans-Theo Normann & Bradley J. Ruffle & Christopher M. Snyder, 2007. "Do buyer-size discounts depend on the curvature of the surplus function? Experimental tests of bargaining models," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 747-767, 09.
- Hans Normann, Bradley Ruffle and Christopher Snyder, 2004. "Do Buyer-Size Discounts Depend on the Curvature of the Surplus Function? Experimental Tests of Bargaining Models," Royal Holloway, University of London: Discussion Papers in Economics 04/01, Department of Economics, Royal Holloway University of London, revised Apr 2004.
- von Ungern-Sternberg, Thomas, 1988.
"Excess Capacity as a Commitment to Promote Entry,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 37(2), pages 113-22, December.
- Thomas VON UNGERN-STERNBERG, 1988. "Excess Capacity as a Commitment to Promote Entry," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 8801, Université de Lausanne, Faculté des HEC, DEEP.
- Ernst Fehr & Klaus M. Schmidt, .
"A Theory of Fairness, Competition and Cooperation,"
IEW - Working Papers
004, Institute for Empirical Research in Economics - University of Zurich.
- Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
- Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
- Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
- Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
- A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
- Abbink, Klaus & Darziv, Ron & Gilula, Zohar & Goren, Harel & Irlenbusch, Bernd & Keren, Arnon & Rockenbach, Bettina & Sadrieh, Abdolkarim & Selten, Reinhard & Zamir, Shmuel, 2003. "The Fisherman's Problem: Exploring the tension between cooperative and non-cooperative concepts in a simple game," Journal of Economic Psychology, Elsevier, vol. 24(4), pages 425-445, August.
- Benjamin Klein & Joshua D. Wright, 2007. "The Economics of Slotting Contracts," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 421-454.
- Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2004.
"Regular quantal response equilibrium,"
1203, California Institute of Technology, Division of the Humanities and Social Sciences.
- Michael FLORIG, 2001. "On Irreducible Economies," Annals of Economics and Statistics, GENES, issue 61.
- Weg, Eythan & Zwick, Rami, 1994. "Toward the settlement of the fairness issues in ultimatum games : A bargaining approach," Journal of Economic Behavior & Organization, Elsevier, vol. 24(1), pages 19-34, June.
- Selten, Reinhard & Ockenfels, Axel, 1998. "An experimental solidarity game," Journal of Economic Behavior & Organization, Elsevier, vol. 34(4), pages 517-539, March.
- Deck, Cary A. & Wilson, Bart J., 2008. "Experimental gasoline markets," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 134-149, July.
- Vesna Prasnikar & Alvin E. Roth, 1992. "Considerations of Fairness and Strategy: Experimental Data from Sequential Games," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 865-888.
- Judith R. Gelman & Steven C. Salop, 1983. "Judo Economics: Capacity Limitation and Coupon Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 315-325, Autumn.
When requesting a correction, please mention this item's handle: RePEc:uct:uconnp:2012-22. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark McConnel)
If references are entirely missing, you can add them using this form.