Investment Incentives and Market Power: An Exerimental Analysis. Economic Analysis Group

摘要

We examine investment incentives and market power in an experimental market. We characterize market power as the strategic interdependence of subjects investment decisions and output decisions. The market is designed so that investment and output decisions can be jointly characterized as strategies within a game. A Nash-Cournot equilibrium of the game provides a way of characterizing how investment incentives and market power interact. Subjects could invest in two different production technologies and could produce output to serve as many as two different demand conditions. The technologies were analogous to baseload capacity and peaking capacity in wholesale electricity markets. The Nash-Cournot benchmark constituted a good indicator of subjects output decisions in that output cycled around the Cournot benchmark. Thus, on average, consumers extracted the surplus available to them in the equilibrium. While we do not observe Edgeworth Cycles in prices or outputs, we do see them in the producer surplus series. Producers dissipated some of the surplus they could have extracted in the equilibrium by overinvesting in peaking capacity and underinvesting in baseload capacity.