Price Increasing Competition? Experimental Evidence
AbstractEconomic intuition suggests that increased competition generates lower prices. However, recent theoretical work shows that a monopolist may charge a lower price than a firm facing a competitor selling a differentiated product. The direction of the price change when competition is introduced is dependent upon the joint distribution of buyer values for the two products. We explore this relationship using controlled laboratory experiments. Our results indicate that the distribution of buyer values does affect prices in a manner consistent with the theoretical predictions, although price increasing competition is rare due in part to overly intense competition regardless of the distribution of buyer values. We also explore pricing dynamics and find that sellers are more sensitive to their rivals when buyer values are positively correlated.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Chapman University, Economic Science Institute in its series Working Papers with number 10-19.
Length: 26 pages
Date of creation: 2010
Date of revision:
product differentiation; pricing; market structure; market experiments;
Other versions of this item:
- Deck, Cary & Gu, Jingping, 2012. "Price increasing competition? Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 84(3), pages 730-740.
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D4 - Microeconomics - - Market Structure and Pricing
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-30 (All new papers)
- NEP-COM-2010-10-30 (Industrial Competition)
- NEP-EXP-2010-10-30 (Experimental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Yongmin Chen & Scott J. Savage, 2007.
"The Effects Of Competition On The Price For Cable Modem Internet Access,"
07-13, NET Institute.
- 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.
- 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.
- Sam Peltzman, 2000.
"Prices Rise Faster than They Fall,"
Journal of Political Economy,
University of Chicago Press, vol. 108(3), pages 466-502, June.
- 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.
- 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.
- Kyle Hampton & Katerina Sherstyuk, 2010.
"Demand Shocks, Capacity Coordination and Industry Performance: Lessons from Economic Laboratory,"
2010-09, University of Alaska Anchorage, Department of Economics.
- Kyle Hampton & Katerina Sherstyuk, 2010. "Demand Shocks, Capacity Coordination and Industry Performance: Lessons from Economic Laboratory," Working Papers 201023, University of Hawaii at Manoa, Department of Economics.
- 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.
- 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.
- Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 305-39, February.
- 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.
- Edward J Green & Robert H Porter, 1997.
"Noncooperative Collusion Under Imperfect Price Information,"
Levine's Working Paper Archive
1147, David K. Levine.
- Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
- Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
- 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.
- 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.
- 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.
- Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
- Douglas D. Davis & Oleg Korenok, 2009.
"Posted Offer Markets In Near-Continuous Time: An Experimental Investigation,"
Western Economic Association International, vol. 47(3), pages 449-466, 07.
- Douglas D. Davis & Oleg Korenok, 2005. "Posted - Offer Markets In Near Continuous Time: an Experimental Investigation," Working Papers 0504, VCU School of Business, Department of Economics, revised 2007.
- Deck, Cary A. & Wilson, Bart J., 2008. "Experimental gasoline markets," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 134-149, July.
- Brown Kruse, Jamie, 2008. "Simulated and Real Buyers in Posted Offer Markets," Handbook of Experimental Economics Results, Elsevier.
- Ronald Johnson, 2002. "Search Costs, Lags and Prices at the Pump," Review of Industrial Organization, Springer, vol. 20(1), pages 33-50, February.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Megan Luetje).
If references are entirely missing, you can add them using this form.