Journal Article

Does Auctioning of Entry Licences Induce Collusion? An Experimental Study

Theo Offerman and Jan Potters

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 3, pages 769-791
Published in print July 2006 | ISSN: 0034-6527
Published online July 2006 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2006.00395.x
Does Auctioning of Entry Licences Induce Collusion? An Experimental Study

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  • Market Structure, Firm Strategy, and Market Performance
  • Market Structure and Pricing

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We use experiments to examine whether the auctioning of entry rights affects the behaviour of market entrants. Standard economic arguments suggest that the licence fee paid at the auction will not affect pricing since it constitutes a sunk cost. This argument is not uncontested though, and this paper puts it to an experimental test. Our results indicate that an auction of entry licences has a significant positive effect on average prices in oligopoly but not in monopoly. These results are consistent with the conjecture that entry fees induce players to take more risk in pursuit of higher expected profits. In oligopoly, entry fees increase the probability that the market entrants coordinate on a collusive price path. In monopoly, taking more risk does not make sense since average prices are already close to the profit-maximizing price.

Keywords: D44; L11; L12; L13

Journal Article.  12833 words.  Illustrated.

Subjects: Market Structure, Firm Strategy, and Market Performance ; Market Structure and Pricing

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