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Counterintuitive number effects in experimental oligopolies

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  • Henrik Orzen

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Abstract

Recent theoretical research on oligopolistic competition suggests that under certain conditions prices increase with the number of competing firms. However, this counterintuitive result is based on comparative-static analyses which neglect the importance of dynamic strategies in naturally-occurring markets. When firms compete repeatedly, supra-competitive prices can become sustainable but this is arguably more difficult when more firms operate in the market. This paper reports the results of laboratory experiments investigating pricing behavior in a setting in which (static) theory predicts the counterintuitive number effect. Under a random matching protocol, which retains much of the one-shot nature of the model, the data corroborates the gametheoretic prediction. Under fixed matching duopolists post substantially higher prices, whereas prices in quadropolies remain very similar. As a result, the predicted effect is no longer observed, and towards the end the reverse effect is observed.

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File URL: http://hdl.handle.net/10.1007/s10683-007-9174-0
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Bibliographic Info

Article provided by Springer in its journal Experimental Economics.

Volume (Year): 11 (2008)
Issue (Month): 4 (December)
Pages: 390-401

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Handle: RePEc:kap:expeco:v:11:y:2008:i:4:p:390-401

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Web page: http://www.springerlink.com/link.asp?id=102888

Related research

Keywords: Market concentration; Experiments; Tacit collusion; C72; C92; D43;

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References

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  1. Normann, Hans-Theo & Wallace, Brian, 2011. "The impact of the termination rule on cooperation in a prisoner's dilemma experiment," DICE Discussion Papers 19, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Andreoni,J. & Croson,R., 1998. "Partners versus strangers : random rematching in public goods experiments," Working papers 11, Wisconsin Madison - Social Systems.
  3. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
  4. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
  5. 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.
  6. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
  7. 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.
  8. Holt, Charles A, 1985. "An Experimental Test of the Consistent-Conjectures Hypothesis," American Economic Review, American Economic Association, vol. 75(3), pages 314-25, June.
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Citations

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Cited by:
  1. Douglas D. Davis & Korenok Oleg & Robert Reilly, 2007. "Re-matching, Information and Sequencing Effects in Posted Offer Markets," Working Papers 0701, VCU School of Business, Department of Economics, revised Oct 2007.
  2. Lugovskyy, Volodymyr & Puzzello, Daniela & Tucker, Steven, 2008. "An experimental investigation of overdissipation in the all pay auction," MPRA Paper 8604, University Library of Munich, Germany.
  3. Dario Sacco & Armin Schmutzler, 2008. "Competition and Innovation: An Experimental Investigation," SOI - Working Papers 0807, Socioeconomic Institute - University of Zurich.
  4. Normann, Hans-Theo & Wallace, Brian, 2011. "The impact of the termination rule on cooperation in a prisoner's dilemma experiment," DICE Discussion Papers 19, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  5. Davis, Douglas, 2009. "Pure numbers effects, market power, and tacit collusion in posted offer markets," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 475-488, October.
  6. Iskandar, Deden Dinar & Wuenscher, Tobias & Badhuri, Anik, 2012. "The Determinants of Compliance on Environmental Tax: The Insights of Theoretical and Experimental Approaches Motivated by the Case of Indonesia," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 134977, Agricultural Economics Society.
  7. Andrei Y. Shastitko & Svetlana V. Golovanova, 2014. "Collusion in markets characterized by one large buyer: lessons learned from an antitrust case in Russia," HSE Working papers WP BRP 49/EC/2014, National Research University Higher School of Economics.
  8. Daniele Nosenzo & Simone Quercia & Martin Sefton, 2012. "Cooperation in Small Groups: The Effect of Group Size," Discussion Papers 2012-17, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  9. Iskandar, Deden Dinar & Wuenscher, Tobias, 2012. "Finding the Stronger Impact among Bribery, Financial Reward, and Religious Attitude: The Insights of Experiment on Environmental Tax Compliance in Indonesia," 2012 Conference (56th), February 7-10, 2012, Freemantle, Australia 124316, Australian Agricultural and Resource Economics Society.
  10. Fonseca, Miguel A. & Normann, Hans-Theo, 2012. "Excess capacity and pricing in Bertrand-Edgeworth markets: Experimental evidence," DICE Discussion Papers 67, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  11. Aurora García-Gallego & Nikolaos Georgantzis & Ainhoa Jaramillo-Gutiérrez & Pedro Pereira & J. Carlos Pernías-Cerrillo, 2013. "On the evolution of monopoly pricing in Internet-assisted search markets," Working Papers 2013/05, Economics Department, Universitat Jaume I, Castellón (Spain).

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