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Focal prices and price cycles in an alternating price duopoly experiment

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  • Leufkens, Kasper
  • Peeters, Ronald

    (METEOR)

Abstract

In the infinite horizon alternating price setting duopoly of Maskin and Tirole (1988), a focal price equilibrium and an equilibrium consisting of Edgeworth cycles coexist. In this study we investigate which of these two equilibria is more likely to emerge by means of a laboratory experiment. In 20 out of 27 observations the focal price equilibrium emerges, while price cycles are observed in only one observation. Furthermore, we study the duopoly in case of a long but finite horizon. Although the corresponding unique subgame-perfect equilibrium consists of Edgeworth cycles, experimentally we still observe a focal price in the majority of the observations. Nevertheless, price cycles are observed far more often than for the infinite horizon setting.

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Bibliographic Info

Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 021.

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Date of creation: 2008
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Handle: RePEc:dgr:umamet:2008021

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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm

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Keywords: microeconomics ;

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  1. Pedro Dal Bó, 2002. "Cooperation Under the Shadow of the Future: Experimental Evidence from Infinitely Repeated Games," Working Papers 2002-20, Brown University, Department of Economics.
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  9. Michael D. Noel, 2007. "Edgeworth Price Cycles, Cost-Based Pricing, and Sticky Pricing in Retail Gasoline Markets," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 324-334, May.
  10. Leola B. Ross, . "When Will an Airline Stand Its Ground? An Analysis of Fare Wars," Working Papers 9703, East Carolina University, Department of Economics.
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