An experimental examination of double marginalization and vertical relationships

The presence of a vertical externality, and therefore an incentive to integrate or to impose vertical restraints, is investigated in 11 posted-offer experiments. Upstream markets are characterized by a single seller. When the downstream market consists of three firms, there is no evidence of a vertical externality, and behavior is consistent with the vertically integrated outcome. With a single firm downstream, a vertical externality is present and the Nash prediction is supported. An analysis of individual market behavior reveals that firms approximate their best response functions, with some indication that they improve over time. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: L1; D4.