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.
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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)
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