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Differentiated Product Markets: An Experimental Test of Two Equilibrium Concepts

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  • Peeters,Ronald
  • Strobel,Martin

    (METEOR)

Abstract

In markets with differentiated products Bertrand-Nash equilibria in pure strategies may not exist. Mixed strategies are difficult to calculate. For these cases Morgan and Shy (2000) suggest an alternative solution concept, the undercut-proof equilibrium (UPE). While the Nash-equilibrium is motivated by the question of how ones own behavior influences one''s payoff, the UPE is motivated by the question of how others'' behavior influence one''s payoff. We report on an experiment where we test these two concepts with respect to their comparative statics. Moreover we investigate the nature of subjects'' underlying thinking process. Our results provide strong evidence against the UPE and in favor of Bertrand-Nash.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 020.

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Date of creation: 2005
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Handle: RePEc:unm:umamet:2005020

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Keywords: microeconomics ;

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  1. Kübler, Dorothea & Müller, Wieland, 2001. "Simultaneous and sequential price competition in heterogeneous duopoly markets: Experimental evidence," SFB 373 Discussion Papers 2001,97, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1998. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," Industrial Organization, EconWPA 9803004, EconWPA.
  3. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 10(1), pages 6-38, July.
  4. Bester,Helmut, 1988. "Bertrand equilibrium in a differentiated duopoly," Discussion Paper Serie A, University of Bonn, Germany 209, University of Bonn, Germany.
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Cited by:
  1. Henrik Orzen & Martin Sefton, 2006. "An Experiment on Spatial Price Competition," Discussion Papers, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham 2006-14, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.

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