Focal prices and price cycles in an alternating price duopoly experiment
AbstractIn 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 InfoPaper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 021.
Date of creation: 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-05 (All new papers)
- NEP-EXP-2008-09-05 (Experimental Economics)
- NEP-GTH-2008-09-05 (Game Theory)
- NEP-IND-2008-09-05 (Industrial Organization)
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