Market Concentration and Incentives to Collude in Cournot Oligopoly Experiments

ISER DP No. 1131

65 Pages Posted: 27 Apr 2021

See all articles by Nobuyuki Hanaki

Nobuyuki Hanaki

Osaka University - Institute of Social and Economic Research

Aidas Masiliūnas

National University of Singapore (NUS) - Global Asia Institute

Date Written: April 20, 2021

Abstract

Multiple Cournot oligopoly experiments found more collusive behavior in markets with fewer firms (Huck et al., 2004; Hostmann et al., 2018). This result could be explained by a higher difficulty to coordinate or by lower incentives to collude in markets with more firms. We show that the Quantal Response Equilibrium can explain how the change in incentives alone could result in more collusive output in smaller markets. We propose a new method to manipulate the group size while keeping constant the locations of key outcomes, payoffs at these outcomes and the incentives to collude. Experiments using this normalized payoff function find that the number of firms has no direct effect on the average output or profit. We conclude that higher rates of aggregate collusion in markets with fewer firms are driven by the changes in incentives or focality rather than purely the number of firms. These findings imply that antitrust policies aimed at preventing collusion should focus on incentives rather than on the market concentration.

Keywords: experiment, oligopoly, collusion, group size, Quantal Response Equilibrium

JEL Classification: C72, C91, D43, D83

Suggested Citation

Hanaki, Nobuyuki and Masiliūnas, Aidas, Market Concentration and Incentives to Collude in Cournot Oligopoly Experiments (April 20, 2021). ISER DP No. 1131, Available at SSRN: https://ssrn.com/abstract=3834848 or http://dx.doi.org/10.2139/ssrn.3834848

Nobuyuki Hanaki (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

6-1, Mihogaoka
Suita, Osaka 567-0047
Japan

Aidas Masiliūnas

National University of Singapore (NUS) - Global Asia Institute ( email )

10 Lower Kent Ridge Road
Block S17 #03-01
Singapore
Singapore

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