Information Frictions and Market Power: A Laboratory Study

• Authors: Xavier Vives and Jordi Brandts.
• BSE Working Paper: 110389 | July 16
• Keywords: private information , supply function competition , wholesale electricity market
• JEL codes: C92, D43, L13
• private information
• supply function competition
• wholesale electricity market

In a laboratory experiment with supply function competition with private information about correlated costs we study whether cost interdependence leads to greater market power in relation to when costs are uncorrelated in the ways predicted by Bayesian supply function equilibrium. We find that with uncorrelated costs observed behavior is close to the theoretical benchmark. However, with interdependent costs and precise private signals, market power does not raise above the case of uncorrelated costs contrary to the theoretical prediction. This is consistent with subjects not being able to make inferences from the market price when costs are interdependent. We find that this effect is less severe when private signals are noisier.