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An experimental study of mixed strategy equilibria in simultaneous price-quantity games

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  • Daniel Cracau

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Benjamin Franz

    ()
    (Mathematical Institute, University of Oxford)

Abstract

We study oligopoly games with firms competing in prices and quantities at the same time. We systematically compare our experimental results to the theoretical predictions using the mixed strategy equilibria for linear demand functions. For the duopoly game, we observe that the mixed strategy equilibrium predicts average outcomes better than Cournot and Bertrand do. Subjects' price choices are mainly between marginal cost and monopoly level but do not follow the equilibrium distribution. Although average prices and profits are above theoretical values, we do not observe a high level of collusion as expected in the literature. By comparing simulations based on the mixed strategy equilibrium to our experimental outcomes, we conclude that in this game price setting can be explained by strategic reaction to preceding round results. In contrast to the equilibrium prediction, we observe a decrease in prices and negative average profits for the triopoly game.

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Bibliographic Info

Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 120017.

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Length: 33 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:mag:wpaper:120017

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Keywords: Price-Quantity Competition; Mixed Strategy Equilibria; Experimental Economics; Learning Direction Theory;

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References

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  1. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February.
  2. Muren, Astri, 2000. "Quantity precommitment in an experimental oligopoly market," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 41(2), pages 147-157, February.
  3. Michael McAleer & Felix Chan & Les Oxley, 2013. "Modelling and Simulation: An Overview," Tinbergen Institute Discussion Papers, Tinbergen Institute 13-069/III, Tinbergen Institute.
  4. Hamilton, J.H. & Slutsky, S.M., 1988. "Endogenous Timing In Duopoly Games: Stackelberg Or Cournot Equilibria," Papers, Florida - College of Business Administration 88-4, Florida - College of Business Administration.
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  6. Dechenaux, Emmanuel & Kovenock, Dan, 2003. "Endogenous Rationing, Price Dispersion, and Collusion in Capacity Constrained Supergames," Purdue University Economics Working Papers, Purdue University, Department of Economics 1164, Purdue University, Department of Economics.
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  8. Potters, Jan & Rockenbach, Bettina & Sadrieh, Abdolkarim & van Damme, Eric, 2004. "Collusion under yardstick competition: an experimental study," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(7), pages 1017-1038, September.
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  10. Bruttel, Lisa V., 2009. "Group dynamics in experimental studies--The Bertrand Paradox revisited," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 69(1), pages 51-63, January.
  11. Dufwenberg, M. & Gneezy, U., 1998. "Price competition and market concentration: An experimental study," Discussion Paper, Tilburg University, Center for Economic Research 1998-27, Tilburg University, Center for Economic Research.
  12. Tasnadi, Attila, 2006. "Price vs. quantity in oligopoly games," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(3), pages 541-554, May.
  13. Abbink, Klaus & Brandts, Jordi, 2008. "24. Pricing in Bertrand competition with increasing marginal costs," Games and Economic Behavior, Elsevier, Elsevier, vol. 63(1), pages 1-31, May.
  14. Osborne, Martin J. & Pitchik, Carolyn, 1983. "Price Competition in a Capacity-Constrained Duopoly," Working Papers, C.V. Starr Center for Applied Economics, New York University 83-08, C.V. Starr Center for Applied Economics, New York University.
  15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
  16. Christoph Engel, 2006. "How Much Collusion. A Meta-Analysis On Oligopoly Experiments," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2006_27, Max Planck Institute for Research on Collective Goods.
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Cited by:
  1. Daniel Cracau & Abdolkarim Sadrieh, 2014. "The Divergent Effects of Long-Term and Short-Term Entry Investments on Home Market Cartels," FEMM Working Papers, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management 140003, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  2. Tiziana Assenza & Jakob Grazzini & Cars Hommes & Domenico Massaro, 2014. "PQ Strategies in Monopolistic Competition: Some Insights from the Lab," DISCE - Working Papers del Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) def11, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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