Steven R. Elliot, Robrt Godby, and Jamie Brown Kruse

"An experimental examination of vertical control and cost predation"
JEL codes: D4, C91, L11, L22
Keywords: cost predation, dominant firm, vertical control, market experiments

Abstract: In recent years there has been renewed interest in and concern about firms' use of vertical control as a way to exert market power. Such behavior could be used to gain a competitive advantage over rivals in input or output markets. This paper uses laboratory experimental methods to examine three questions: (i) is anti-competitive behavior by a dominant firm in input markets an observable behavior? (ii) is cost predation an observable laboratory phenomenon? and (III) if such behaviors are observed, what are the efficiency consequences? Results of this dominant firm experiment indicate that all three questions can be answered in the affirmative, and the negative efficiency consequences can be profound.