Market concentration, strategic suppliers, and price dispersion

A central result in price theory is the law of one price: prices of a homogeneous good sold at different locations should be equal. Empirical studies of the law of one price find that it is often violated. In my dissertation I explore the allocation problem that suppliers face when supplying multiple markets. I use the experimental method to examine the effect of an increase in the number of suppliers in a market, ceteris paribus, has on the allocation decisions of market participants. I also use the experimental method to investigate suppliers that are strategic and show that market concentration and transportation costs restrict the supplier?s ability to coordinate on an efficient equilibrium. A strategic supplier takes account his own effect on prices. Strategic supplies face a difficult strategy coordination problem. If they cannot solve it, then an inefficient outcome may result. Coordination failure may result in price dispersion across the markets. Resulting price signals do not inform suppliers who should respond and by how much. Price signals are not sufficient for suppliers to solve the strategy coordination problem. In the experiments, I observe that increasing the quantity of suppliers, that is the Herfindahl index of concentration, in the market will decrease the frequency of the equilibrium strategy to be played, holding other things constant. Increasing the number of firms in a market, ceteris paribus, increases price dispersion and coordination on an efficient market allocation is decreased. The experiments reveal that the ability of suppliers to coordinate is directly correlated with the optimization premium: the expected payoff difference between best responding to an opponents strategy and the payoff to an inferior response. The incentive is greater to best respond when the optimization premium is larger. Coordination at the equilibrium allocation is quicker.