PIVOTAL SUPPLIERS AND MARKET POWER IN EXPERIMENTAL SUPPLY FUNCTION COMPETITION*

We use experiments to study market power with supply function competition, akin to the competition in electricity markets. Our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. Observed behaviour is consistent with the equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model. In the worldwide process of regulatory reform in the electricity industry, the possible existence of market power is one of the basic problems analysts and policy makers have to deal with. Field data document the existence of reduced competition due to market power in some electric power markets (Wolfram, 1999; Borenstein et al., 2002). The severe welfare losses this may cause are a major concern that needs to be addressed to fully assess the success of the reforms. If non-competitive prices can easily persist in these markets, this creates the need to find measures to mitigate market power