Communication in vertical markets: Experimental evidence

- Study experimental vertical markets with upstream monopolist and competing downstream firms.
- In basic experimental condition with no communication, commitment problem prevents industry from achieving monopoly outcome; allowing public communication among all firms results in fairly complete monopolization.
- Allowing private communication between upstream and each downstream firm moves industry halfway toward monopoly outcome; allowing public communication among all firms results in fairly complete monopolization.
- Communication also shifts the distribution of rents between upstream and downstream in a pattern well explained by Nash-in-Nash bargaining.
- Using third-party coders, unsupervised text mining, among other approaches, we uncover features of the rich chat data that are correlated with market outcomes.

An upstream monopolist supplying competing downstream firms may fail to monopolize the market because it is unable to commit not to behave opportunistically. We build on previous experimental studies of this well-known commitment problem by introducing communication. Allowing the upstream firm to chat privately with each downstream firm reduces total offered quantity from near the Cournot level (observed in the absence of communication) halfway toward the monopoly level. Allowing all firms to chat together openly results in complete monopolization. Downstream firms obtain such a bargaining advantage from open communication that all of the gains from monopolizing the market accrue to them. A simple structural model of Nash-in-Nash bargaining fits the pattern of shifting surpluses well. Using third-party coders, unsupervised text mining, among other approaches, we uncover features of the rich chat data that are correlated with market outcomes. We conclude with a discussion of the antitrust implications of open communication in vertical markets.