Price Floors and Competition
AbstractA 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 InfoPaper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2002:13.
Length: 31 pages
Date of creation: 19 Jun 2002
Date of revision:
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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Price competition; price floors; Bertrand model; experiment; salience; logit equilibrium; threats;
Other versions of this item:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- 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-2002-09-11 (All new papers)
- NEP-EXP-2002-09-11 (Experimental Economics)
- NEP-MIC-2002-10-07 (Microeconomics)
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