Price Competition and Market Concentration: An experimental Study
AbstractThe 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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Bibliographic InfoPaper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 1999:4.
Length: 26 pages
Date of creation: 17 Sep 1999
Date of revision:
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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:
- NEP-ALL-2000-01-24 (All new papers)
- NEP-EXP-2000-01-24 (Experimental Economics)
- NEP-IND-2000-01-24 (Industrial Organization)
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