Concentration and Competition: An Experiment

Recent theoretical research on oligopolistic competition suggests that prices may increase when more firms compete in a market. However, this finding is based on comparative-static analyses of static models, which overlook the possibility that sellers may be able to charge supra-competitive prices in a dynamic setting and that this is more likely to be sustained with fewer competitors. Previous laboratory evidence corroborating the comparative-static result was generated using a random matching protocol which retains much of the one-shot character of the theory. In a new experiment we reexamine the number effect in repeated markets and find that duopolists now post substantially higher prices, while average prices in quadropolies remain very similar. As a result, the predicted effect is not observed, and towards the end the reverse effect is observed.