Dufwenberg, Martin () (Department of Economics) Gneezy, Uri () (Department of Economics)
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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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
1998:8.
Length: 19 pages Date of creation: 03 Mar 1998 Date of revision: Publication status: Published in International Journal of Industrial Organization, 2000, pages 7-22. Handle: RePEc:hhs:uunewp:1998_008
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Find related papers by JEL classification: C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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.
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