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Risk Dominance Selects the Leader. An Experimental Analysis

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Author Info
Antonio Cabrales
Walter Garcia Fontes ()
Massimo Motta

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Abstract

Coordination games arise very often in studies of industrial organization and international trade. This type of games has multiple strict equilibria, and therefore the identification of testable predictions is very difficult. We study a vertical product differentiation model with two asymmetric players choosing first qualities and then prices. This game has two equilibria for some parameter values. However, we apply the risk dominance criterion suggested by Harsanyi and Selten and show that it always selects the equilibrium where the leader is the firm having some initial advantage. We then perform an experimental analysis to test whether the risk dominance prediction is supported by the behaviour of laboratory agents. We show that the probability that the risk dominance prediction is right depends crucially on the degree of asymmetry of the game. The stronger the asymmetries the higher the predictive power of the risk dominance criterion.

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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 222.

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Date of creation: Feb 1997
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Handle: RePEc:upf:upfgen:222

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Related research
Keywords: Risk dominance equilibrium selection leadership games experimental economics Leex

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Find related papers by 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
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
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  1. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Blackwell Publishing, vol. 41(2), pages 113-31, June. [Downloadable!] (restricted)
  2. Binmore, Ken & Shaked, Avner & Sutton, John, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 753-70, November. [Downloadable!] (restricted)
  3. Budd, Christopher & Harris, Christopher & Vickers, John, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 543-73, July. [Downloadable!] (restricted)
  4. Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1989. "Communication in the Battle of the Sexes Game: Some Experimental Results," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 568-587, Winter. [Downloadable!] (restricted)
  5. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January. [Downloadable!] (restricted)
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  6. Harsanyi John C., 1995. "A New Theory of Equilibrium Selection for Games with Incomplete Information," Games and Economic Behavior, Elsevier, vol. 10(2), pages 318-332, August. [Downloadable!] (restricted)
  7. Tilman Borgers & Rajiv Sarin, 1993. "Learning Through Reinforcement and Replicator Dynamics," University of California at San Diego, Economics Working Paper Series 93-47, Department of Economics, UC San Diego.
  8. Selten,Reinhard, . "An axiomatic theory of a risk dominance measure for bipolar games with linear incentives," Discussion Paper Serie B 252, University of Bonn, Germany.
  9. Selten, Reinhard, Abdolkarim Sadrieh, and Klaus Abbink, 1995. "Money does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Discussion Paper Serie B 343, University of Bonn, Germany.
  10. Cabrales, Antonio & Motta, Massimo, 1996. "Country Asymmetries, Endogenous Product Choice and the Speed of Trade Liberalization," CEPR Discussion Papers 1326, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring. [Downloadable!] (restricted)
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  12. Reinganum, Jennifer F, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 81-99, February. [Downloadable!] (restricted)
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  13. Brezis, Elise S & Krugman, Paul R & Tsiddon, Daniel, 1993. "Leapfrogging in International Competition: A Theory of Cycles in National Technological Leadership," American Economic Review, American Economic Association, vol. 83(5), pages 1211-19, December. [Downloadable!] (restricted)
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  15. Grossman, Gene M & Helpman, Elhanan, 1991. "Quality Ladders and Product Cycles," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 557-86, May. [Downloadable!] (restricted)
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  16. Friedman, Daniel, 1996. "Equilibrium in Evolutionary Games: Some Experimental Results," Economic Journal, Royal Economic Society, vol. 106(434), pages 1-25, January. [Downloadable!] (restricted)
  17. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August. [Downloadable!] (restricted)
  18. Dasgupta, Partha & Stiglitz, Joseph E, 1988. "Learning-by-Doing, Market Structure and Industrial and Trade Policies," Oxford Economic Papers, Oxford University Press, vol. 40(2), pages 246-68, June. [Downloadable!] (restricted)
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  19. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring. [Downloadable!] (restricted)
  20. Bruno Broseta, 1993. "Strategic Uncertainty and Learning in Coordination Games," University of California at San Diego, Economics Working Paper Series 93-34, Department of Economics, UC San Diego.
  21. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  22. Massimo MOTTA & Jean-François THISSE & Antonio CABRALES, 1996. "On the Persistence of Leadership or Leapfrogging in International Trade," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9625, Université de Lausanne, Faculté des HEC, DEEP.
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  23. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-48, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Sven Fischer & Werner Güth & Wieland Müller & Andreas Stiehler, 2006. "From ultimatum to Nash bargaining: Theory and experimental evidence," Experimental Economics, Springer, vol. 9(1), pages 17-33, April. [Downloadable!] (restricted)
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  2. José Luis Moraga-González & Jean-Marie Viaene, 2004. "Anti-dumping, Intra-industry Trade and Quality Reversals," Tinbergen Institute Discussion Papers 04-124/2, Tinbergen Institute. [Downloadable!]
    Other versions:
  3. Rosemarie Nagel & Antonio Cabrales & Roc Armenter, 2002. "Equilibrium Selection through Incomplete Information in Coordination Games: An Experimental Study," Economics Working Papers 601, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  4. Antonio Cabrales, 2003. "Pharmaceutical Generics, Vertical Product Differentiation, and Public Policy," Working Papers, Research Center on Health and Economics 662, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  5. Eric van Damme & Sjaak Hurkens, 1998. "Endogenous Price Leadership," Economics Working Papers 289, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  6. Werner Smolny, 2003. "Determinants of innovation behaviour and investment estimates for west-german manufacturing firms," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 12(5), pages 449-463, October. [Downloadable!] (restricted)
  7. Jose-Luis Moraga & Jean-Marie Viaene, 2001. "Trade and Industrial Policy of Transition Economies," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  8. Antonio Cabrales & Walter Garcia Fontes, 2000. "Estimating Learning Models from Experimental Data," Economics Working Papers 501, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  9. Olivier Bonroy & Christos Constantatos, 2005. "Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms," Industrial Organization 0506009, EconWPA. [Downloadable!]
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