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Pivotal Suppliers and Market Power in Experimental Supply Function Competition


  • Financial support by the Spanish Ministerio de Economía y Competitividad (Grant: ECO2011-29847-C02-01), the Generalitat de Catalunya (Grant: 2009 SGR 820), the Antoni Serra Ramoneda Research Chair (UAB-CatalunyaCaixa), Consolider-Ingenio 2010 (CSD2006-00016) and the Barcelona GSE Research Support Programme is gratefully acknowledged. David Rodríguez provided excellent research assistance. Three anonymous referees and the editor provided very helpful suggestions for improving a previous version of this article. Remaining errors are ours.


We use experiments to study market power with supply function competition, akin to the competition in electricity markets. Our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. Observed behaviour is consistent with the equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model.

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