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Price increasing competition? Experimental evidence

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  • Deck, Cary
  • Gu, Jingping

Abstract

Economic intuition suggests competition lowers prices. However, recent theoretical work reveals a monopolist may prefer to charge a lower price than a seller facing a competitor with a differentiated product depending upon the joint distribution of buyer values for the products. We explore this relationship using controlled laboratory experiments. Our results indicate price increasing competition is rare due in part to overly intense competition, but after controlling for such behavioral reactions, we find some support for the model. We also explore pricing dynamics and find that sellers are more sensitive to their rivals when buyer values are positively correlated.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 84 (2012)
Issue (Month): 3 ()
Pages: 730-740

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Handle: RePEc:eee:jeborg:v:84:y:2012:i:3:p:730-740

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Product differentiation; Pricing dynamics; Market structure; Experiments;

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References

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  1. Brown Kruse, Jamie, 2008. "Simulated and Real Buyers in Posted Offer Markets," Handbook of Experimental Economics Results, Elsevier.
  2. Yongmin Chen & Scott J Savage, 2011. "The Effects of Competition on the Price for Cable Modem Internet Access," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 201-217, February.
  3. John Aloysius & Cary Deck & Amy Farmer, 2012. "A Comparison of Bundling and Sequential Pricing in Competitive Markets: Experimental Evidence," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 19(1), pages 25-51, February.
  4. Cary A. Deck & Bart J. Wilson, 2006. "Tracking Customer Search to Price Discriminate," Economic Inquiry, Western Economic Association International, vol. 44(2), pages 280-295, April.
  5. Castanias, Rick & Johnson, Herb, 1993. "Gas Wars: Retail Gasoline Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 171-74, February.
  6. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  7. Ronald Johnson, 2002. "Search Costs, Lags and Prices at the Pump," Review of Industrial Organization, Springer, vol. 20(1), pages 33-50, February.
  8. Raphael Thomadsen, 2007. "Product Positioning and Competition: The Role of Location in the Fast Food Industry," Marketing Science, INFORMS, vol. 26(6), pages 792-804, 11-12.
  9. Severin Borenstein & A. Colin Cameron, 1992. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," NBER Working Papers 4138, National Bureau of Economic Research, Inc.
  10. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
  11. Cary A. Deck & Bart J. Wilson, 2003. "Automated Pricing Rules in Electronic Posted Offer Markets," Economic Inquiry, Western Economic Association International, vol. 41(2), pages 208-223, April.
  12. Kyle Hampton & Katerina Sherstyuk, 2010. "Demand Shocks, Capacity Coordination and Industry Performance: Lessons from Economic Laboratory," Working Papers 2010-09, University of Alaska Anchorage, Department of Economics.
  13. Douglas D. Davis & Oleg Korenok, 2009. "Posted Offer Markets In Near-Continuous Time: An Experimental Investigation," Economic Inquiry, Western Economic Association International, vol. 47(3), pages 449-466, 07.
  14. Deck, Cary A. & Wilson, Bart J., 2008. "Experimental gasoline markets," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 134-149, July.
  15. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
  16. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
  17. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  18. Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1041-61, October.
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