ADVANCE PRODUCTION, INVENTORIES, AND MARKET POWER: AN EXPERIMENTAL INVESTIGATION

Authors

  • DOUGLAS D. DAVIS

    1. Davis: Professor, Virginia Commonwealth University, Richmond VA 23284-4000. Phone 1-804-828-7140, Fax 1-804-828-9103, E-mail dddavis@vcu.edu
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    • Thanks for helpful comments to Asen Ivanov, Oleg Korenok, Robert Reilly, Roger Sherman, associate editor Yan Chen, and two anonymous referees. The usual disclaimer applies. Thanks also to Matthew Nuckols for software development and to Michael Brown for help in conducting the laboratory sessions. Financial assistance from the National Science Foundation (SES 1034527) and the Virginia Commonwealth University Summer Research Grants Program is gratefully acknowledged. Instructions, experimental data, and appendices are available at http://www.people.vcu.edu/~dddavis.


Abstract

We report an experiment that assesses the effects of alterations in production conditions and product durability on market power in Bertrand-Edgeworth duopolies. Static equilibrium analysis predicts that advance (rather than “to demand”) production raises prices, but does not affect profits. The further addition of a simple inventory option causes prices to fall and seller earnings to increase. Contrary to these predictions, we observe similar prices in baseline and advance production treatments, but lower profits given advance production. An inventory option reduces both prices and earnings. Results are driven by the treatments' effects on sellers' capacities to tacitly collude. (JEL C9, D4, L4)

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