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.
ASJC Scopus subject areas
- Economics and Econometrics