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Price Increasing Competition? Experimental Evidence

Author

Listed:
  • Cary Deck

    (Department of Economics, University of Arkansas)

  • Jingping Gu

    (Department of Economics, University of Arkansas)

Abstract

Economic 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.

Suggested Citation

  • Cary Deck & Jingping Gu, 2010. "Price Increasing Competition? Experimental Evidence," Working Papers 10-19, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:10-19
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    References listed on IDEAS

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    Cited by:

    1. Torsten J. Gerpott & Jan Berends, 2022. "Competitive pricing on online markets: a literature review," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(6), pages 596-622, December.
    2. Gandomi, Amir & Zolfaghari, Saeed, 2018. "To tier or not to tier: An analysis of multitier loyalty programs׳ optimality conditions," Omega, Elsevier, vol. 74(C), pages 20-36.

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    More about this item

    Keywords

    product differentiation; pricing; market structure; market experiments;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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