Advance Production, Inventories and Market Power: An Experimental Investigation

This paper reports an experiment conducted to assess the effects of alterations in production conditions and product durability on market power in Bertrand-Edgeworth duopolies. Experiment results indicate that advance production increases market power in the sense that mean transaction prices increase relative to static Nash equilibrium predictions for a baseline market. In a similar way, a simple inventory option reduces market power. We also find that both advance production and inventory carryover undermine a strong tendency toward tacit collusion observed in our baseline duopoly markets.