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Price Floors and Competition

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Author Info

  • Dufwenberg, Martin

    ()
    (Dept. of Economics, Stockholm University)

  • Gneezy, Uri

    ()
    (University of Chiacgo Graduate School og Business and Technion)

  • Goeree, Jacob K.

    (CREED, University of Amsterdam)

  • Nagel, Rosemarie

    ()
    (Pompeu Fabra)

Abstract

A potential source of instability of many economic models is that agents have little incentive to stick with the equilibrium. We show experimentally that this may matter with price competition. The control variable is a price floor, which increases the cost of deviating from equilibrium. Theoretically the floor allows competitors to obtain higher profits, as low prices are excluded. However, behaviorally the opposite is observed; with a floor competitors receive lower joint profits. An error model (logit equilibrium) captures some but not all the important features of the data. We provide statistical support for a complementary explanation, which refers to how "threatening" an equilibrium is. We discuss the economic import of these findings, concerning matters like resale price maintenance and auction design.

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Bibliographic Info

Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2002:13.

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Length: 31 pages
Date of creation: 19 Jun 2002
Date of revision:
Handle: RePEc:hhs:sunrpe:2002_0013

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Keywords: Price competition; price floors; Bertrand model; experiment; salience; logit equilibrium; threats;

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References

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  1. Dufwenberg, Martin & Gneezy, Uri, 1999. "Price Competition and Market Concentration: An experimental Study," Research Papers in Economics 1999:4, Stockholm University, Department of Economics.
  2. Cason, Timothy N., 1995. "Cheap talk price signaling in laboratory markets," Information Economics and Policy, Elsevier, vol. 7(2), pages 183-204, June.
  3. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2000. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 39-57, January.
  4. Dufwenberg, Martin & Gneezy, Uri, 2002. "Information disclosure in auctions: an experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 48(4), pages 431-444, August.
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  10. Fershtman, Chaim & Fishman, Arthur, 1994. "The 'perverse' effects of wage and price controls in search markets," European Economic Review, Elsevier, vol. 38(5), pages 1099-1112, May.
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  12. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  13. Asheim, Geir B. & Dufwenberg, Martin, 2003. "Admissibility and common belief," Games and Economic Behavior, Elsevier, vol. 42(2), pages 208-234, February.
  14. Gladys López-Acevedo, 1997. "Quantal response equilibria for posted offer-markets," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 12(2), pages 95-131.
  15. Plott, Charles R, 1982. "Industrial Organization Theory and Experimental Economics," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1485-1527, December.
  16. Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-72, March.
  17. Philip A. Haile & Ali Hortaçsu & Grigory Kosenok, 2004. "On the Empirical Content of Quantal Response Models," Levine's Bibliography 122247000000000218, UCLA Department of Economics.
  18. C. Monica Capra, 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, vol. 89(3), pages 678-690, June.
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