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Price Competition and Market Concentration: An experimental Study

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Author Info
Dufwenberg, Martin () (Dept. of Economics, Stockholm University)
Gneezy, Uri () (Department of Economics, University of Haifa, Israel)
Abstract

The classical price competition model (named after Bertrand), prescribes that in equilibrium prices are equal to marginal costs. Moreover, prices do not depend on the number of competitors. Since this outcome is not in line with real-life observations, it is known as the Bertrand Paradox". Many theoretical problems with the original model have been considered as an explanation of the paradox in the literature.

In this paper we experimentally investigate a model which is immune to the theoretical critique of the original model. We find, nevertheless, that the outcome does depend on the number of competitors: the Bertrand solution does not predict well when the number of competitors is two, but after some opportunities for learning are provided it tends to predict well when the number of competitors is three or four. A bounded rationality explanation of this is suggested.

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Publisher Info
Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 1999:4.

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Length: 26 pages
Date of creation: 17 Sep 1999
Date of revision:
Handle: RePEc:hhs:sunrpe:1999_0004

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Related research
Keywords: Bertrand Model; Price Competition; Boundered Rationality; noise-bidding;

Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

This paper has been announced in the following NEP Reports:

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  1. Fudenberg, Drew & Levine, David, 1998. "Learning in games," European Economic Review, Elsevier, vol. 42(3-5), pages 631-639, May. [Downloadable!] (restricted)
  2. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August. [Downloadable!] (restricted)
  3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  4. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, December.
  5. Hoggatt, Austin C & Friedman, James W & Gill, Shlomo, 1976. "Price Signaling in Experimental Oligopoly," American Economic Review, American Economic Association, vol. 66(2), pages 261-66, May. [Downloadable!] (restricted)
  6. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
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