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Counterintuitive Number Effects in Experimental Oligopolies

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  • Henrik Orzen

    (University of Nottingham)

Abstract

Recent theoretical research on oligopolistic competition suggests that under certain conditions prices increase with the number of competing firms. However, this counterintuitive result is based on comparative-static analyses which neglect the importance of dynamic strategies in naturally-occurring markets. When firms compete repeatedly, supra-competitive prices can become sustainable but this is arguably more difficult when more firms operate in the market. This paper reports the results of laboratory experiments investigating pricing behavior in a setting in which (static) theory predicts the counterintuitive number effect. Under a random matching protocol, which retains much of the one-shot nature of the model, the data corroborates the gametheoretic prediction. Under fixed matching duopolists post substantially higher prices, whereas prices in quadropolies remain very similar. As a result, the predicted effect is no longer observed, and towards the end the reverse effect is observed.

Suggested Citation

  • Henrik Orzen, 2006. "Counterintuitive Number Effects in Experimental Oligopolies," Discussion Papers 2006-22, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    • Handle: RePEc:not:notcdx:2006-22
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    10. Douglas Davis & Oleg Korenok & Robert Reilly, 2009. "Re-matching, information and sequencing effects in posted offer markets," Experimental Economics, Springer;Economic Science Association, vol. 12(1), pages 65-86, March.
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    13. Iskandar, Deden Dinar & Wuenscher, Tobias & Badhuri, Anik, 2012. "The Determinants of Compliance on Environmental Tax: The Insights of Theoretical and Experimental Approaches Motivated by the Case of Indonesia," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 134977, Agricultural Economics Society.
    14. Davis, Douglas, 2009. "Pure numbers effects, market power, and tacit collusion in posted offer markets," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 475-488, October.
    15. Lugovskyy, Volodymyr & Puzzello, Daniela & Tucker, Steven, 2010. "An experimental investigation of overdissipation in the all pay auction," European Economic Review, Elsevier, vol. 54(8), pages 974-997, November.
    16. Iskandar, Deden Dinar & Wuenscher, Tobias, 2012. "Finding the Stronger Impact among Bribery, Financial Reward, and Religious Attitude: The Insights of Experiment on Environmental Tax Compliance in Indonesia," 2012 Conference (56th), February 7-10, 2012, Fremantle, Australia 124316, Australian Agricultural and Resource Economics Society.
    17. García-Gallego Aurora & Georgantzís Nikolaos & Pereira Pedro & Pernías-Cerrillo José C., 2016. "Bias and Size Effects of Price-Comparison Platforms: Theory and Experimental Evidence," Review of Network Economics, De Gruyter, vol. 15(1), pages 1-34, March.
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    19. Nobuyuki Hanaki & Aidas Masiliunas, 2021. "Market Concentration and Incentives to Collude in Cournot Oligopoly Experiments," ISER Discussion Paper 1131, Institute of Social and Economic Research, Osaka University.
    20. Iskandar, Deden Dinar & Bhaduri, Anik & Wunscher, Tobias, 2016. "The determinants of compliance with environmental tax: Behavioural study motivated by the case of Indonesia," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 11(1), pages 1-14, March.
    21. Andrei Y. Shastitko & Svetlana V. Golovanova, 2014. "Collusion in markets characterized by one large buyer: lessons learned from an antitrust case in Russia," HSE Working papers WP BRP 49/EC/2014, National Research University Higher School of Economics.
    22. Charles A. Holt & Sean P. Sullivan, 2023. "Permutation tests for experimental data," Experimental Economics, Springer;Economic Science Association, vol. 26(4), pages 775-812, September.
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    More about this item

    Keywords

    Market Concentration; Experiments; Tacit Collusion;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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