Market Concentration, Price Dispersion and Inefficient Cross-hauling in the Laboratory

Abstract

This paper presents experimental evidence suggesting that persistent price dispersion that violates the law of one price may be a disequilibrium phenomena. Increasing market concentration increases the pecuniary incentive to give a best response andsatisfy the law of one price, that is, a few large firms have a larger pecuniary incentive to solve the allocation coordination problem than many small firms. In the two firm treatment, the law of one price holds. However, in both treatments with small firms or transportation costs we observe persistent price dispersion. The paper also finds evidence of ineficient cross-hauling for purely strategic reasons.