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Collusion in Growing and Shrinking Markets: Empirical Evidence from Experimental Duopolies

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  • Klaus Abbink

    ()

  • Jordi Brandts

    ()

Abstract

We study collusive behaviour in experimental duopolies that compete in prices under dynamic demand conditions. In one treatment the demand grows at a constant rate. In the other treatment the demand declines at another constant rate. The rates are chosen so that the evolution of the demand in one case is just the reverse in time than the one for the other case. We use a box-design demand function so that there are no issues of finding and co-ordinating on the collusive price. Contrary to game-theoretic reasoning, our results show that collusion is significantly larger when the demand shrinks than when it grows. We conjecture that the prospect of rapidly declining profit opportunities exerts a disciplining effect on firms that facilitates collusion and discourages deviation.

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Bibliographic Info

Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 648.05.

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Length: 20
Date of creation: 01 Feb 2005
Date of revision:
Handle: RePEc:aub:autbar:648.05

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Keywords: Laboratory experiments; industrial organisation; oligopoly; price competition; collusion;

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References

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  1. repec:cup:cbooks:9780521816632 is not listed on IDEAS
  2. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 1999. "Learning in Cournot Oligopoly--An Experiment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(454), pages C80-95, March.
  3. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Tacit Collusion," IDEI Working Papers 186, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Dufwenberg, Martin & Gneezy, Uri, 1998. "Price Competition and Market Concentration: An Experimental Study," Working Paper Series, Uppsala University, Department of Economics 1998:8, Uppsala University, Department of Economics.
  5. Steffen Huck & Hans-Theo Normann & Jörg Oechssler, 2001. "Two are Few and Four are Many: Number Effects in Experimental Oligopolies," Bonn Econ Discussion Papers, University of Bonn, Germany bgse12_2001, University of Bonn, Germany.
  6. Abbink, Klaus & Brandts, Jordi, 2008. "24. Pricing in Bertrand competition with increasing marginal costs," Games and Economic Behavior, Elsevier, vol. 63(1), pages 1-31, May.
  7. Theo Offerman & Jan Potters & Joep Sonnemans, 2002. "Imitation and Belief Learning in an Oligopoly Experiment," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 973-997.
  8. Holt, Charles A & Langan, Loren W & Villamil, Anne P, 1986. "Market Power in Oral Double Auctions," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 24(1), pages 107-23, January.
  9. Isaac, R. Mark & Reynolds, Stanley S., 1992. "Schumpeterian competition in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 59-100, January.
  10. Martin Dufwenberg & Uri Gneezy & Jacob Goeree & Rosemarie Nagel, 2007. "Price floors and competition," Economic Theory, Springer, Springer, vol. 33(1), pages 211-224, October.
  11. Selten, Reinhard & Apesteguia, Jose, 2005. "Experimentally observed imitation and cooperation in price competition on the circle," Games and Economic Behavior, Elsevier, vol. 51(1), pages 171-192, April.
  12. Jose Apesteguia & Martin Dufwenberg & Reinhard Selten, 2007. "Blowing the Whistle," Economic Theory, Springer, Springer, vol. 31(1), pages 143-166, April.
  13. Abbink, Klaus & Abdolkarim Sadrieh, 1995. "RatImage - research Assistance Toolbox for Computer-Aided Human Behavior Experiments," Discussion Paper Serie B 325, University of Bonn, Germany.
  14. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, 9.
  15. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, Springer, vol. 5(1), pages 19-32, January.
  16. Abbink, Klaus & Abdolkarim Sadrieh, 1997. "RatImage 3.30," Discussion Paper Serie B 417, University of Bonn, Germany.
  17. Smith, Vernon L, 1982. "Markets as Economizers of Information: Experimental Examination of the "Hayek Hypothesis"," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 20(2), pages 165-79, April.
  18. Abbink, Klaus & Abdolkarim Sadrieh, 1996. "RatDemo - A Ready-to-Run Experiment in 99 Program Lines," Discussion Paper Serie B 354, University of Bonn, Germany.
  19. Robert Moir, 1998. "A Monte Carlo Analysis of the Fisher Randomization Technique: Reviving Randomization for Experimental Economists," Experimental Economics, Springer, Springer, vol. 1(1), pages 87-100, June.
  20. Reynolds, Stanley S & Isaac, R Mark, 1992. "Stochastic Innovation and Product Market Organization," Economic Theory, Springer, Springer, vol. 2(4), pages 525-45, October.
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Cited by:
  1. Pedro Mendi & Róbert F. Veszteg, 2009. "Sustainability of collusion: evidence from the late 19th century basque iron and steel industry," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 33(3), pages 385-405, September.
  2. Miguel A. Fonseca & Hans-Theo Normann, 2013. "Excess Capacity and Pricing in Bertrand-Edgeworth Markets: Experimental Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 169(2), pages 199-228, June.
  3. Roel van Veldhuizen & Joep Sonnemans, 2011. "Nonrenewable Resources, Strategic Behavior and the Hotelling Rule: An Experiment," Tinbergen Institute Discussion Papers 11-014/1, Tinbergen Institute.
  4. Ruffle, Bradley J., 2009. "When Do Large Buyers Pay Less? Experimental Evidence," MPRA Paper 16683, University Library of Munich, Germany.
  5. Goppelsroeder, Marie, 2009. "Entry in Collusive Markets: An Experimental Study," MPRA Paper 14707, University Library of Munich, Germany.

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