Buyer Concentration as a Source of Countervailing Power: Evidence from Experimental Posted-Offer Markets

Although much research has been devoted to the impact of seller structure on market outcomes, considerably less is known about the influence of buyer structure. We examine the impact of buyer concentration on the pricing of a monopolist. We design experimental markets in which a monopolist faces either two or four buyers. Markets with two buyers achieve significantly lower prices, sometimes below competitive levels, than those with four buyers. We design an additional pair of treatments to pinpoint the source of this difference. We attribute the lower prices in the two-buyer treatment to the monopolist pricing more cautiously when there are fewer buyers in order to avoid costly losses in sales. Buyer concentration may thus be an effective source of countervailing power.