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Price Increasing Competition? Experimental Evidence

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  • 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.

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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 10-19.

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Length: 26 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:chu:wpaper:10-19

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Keywords: product differentiation; pricing; market structure; market experiments;

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  1. 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.
  2. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
  3. 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.
  4. Ronald Johnson, 2002. "Search Costs, Lags and Prices at the Pump," Review of Industrial Organization, Springer, vol. 20(1), pages 33-50, February.
  5. Douglas D. Davis & Oleg Korenok, 2009. "Posted Offer Markets In Near-Continuous Time: An Experimental Investigation," Economic Inquiry, Western Economic Association International, vol. 47(3), pages 449-466, 07.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. Kyle Hampton & Katerina Sherstyuk, 2010. "Demand Shocks, Capacity Coordination and Industry Performance: Lessons from Economic Laboratory," Working Papers 2010-09, University of Alaska Anchorage, Department of Economics.
  12. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  13. Brown Kruse, Jamie, 2008. "Simulated and Real Buyers in Posted Offer Markets," Handbook of Experimental Economics Results, Elsevier.
  14. 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.
  15. 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.
  16. 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.
  17. Deck, Cary A. & Wilson, Bart J., 2008. "Experimental gasoline markets," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 134-149, July.
  18. 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.
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