An experiment on supply function competition

- We investigate the potential role of bounded rationality in supply function competition.
- We find that, overall, equilibrium organizes bidding behavior well.
- However, bidding is sensitive to theoretically irrelevant changes of the demand distribution.
- Also, in a market with asymmetric firms, the larger firm bids more competitively than predicted.

We experimentally investigate key predictions of supply function equilibrium. While, overall, equilibrium organizes bidding behavior well, we observe three important deviations. First, bidding is sensitive to theoretically irrelevant changes of the demand distribution. Second, in a market with symmetric firms we observe tacit collusion in that firms provide less than the predicted quantities. Third, in a market with asymmetric capacities, the larger firm bids more competitively than predicted, while the smaller firms still provide less than equilibrium quantities.