There is a growing body of data from game theory and industrial organization experiments that reveals systematic deviations from Nash equilibrium behavior. In this paper, the perfectly rational decision making embodied in Bertrand Nash equilibrium is generalized to allow for endogenously determined decision errors. Closed form solutions for equilibrium price distributions with endogenous errors are derived for several different models. In some of these models, the price distribution in a quantal response equilibrium, QRE, is affected by changes in structural variables although the Nash equilibrium remains unaltered. The quantal response approach is appealing since it thereby accounts for systematic deviations from the Bertrand Nash equilibrium.
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Article provided by El Colegio de México, Centro de Estudios Económicos in its journal Estudios Económicos.
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Martin Dufwenberg & Uri Gneezy & Jacob Goeree & Rosemarie Nagel, 2007.
"Price floors and competition,"
Economic Theory,
Springer, vol. 33(1), pages 211-224, October.
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