Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition
AbstractThis paper considers a duopoly price-choice game in which the unique Nash equilibrium is the Bertrand outcome. Price competition, however, is imperfect in the sense that the market share of the high-price firm is not zero. Economic intuition suggests that price levels should be positively related to the market share of the high-price firm. Although this relationship is not predicted by standard game theory, it is implied by a generalization of the Nash equilibrium that results when players make noisy (logit) best responses to expected payoff differences. This logit equilibrium model was used to design a laboratory experiment with treatments that correspond to changing the market share of the high-price firm. The model predicts the final-period price averages for both treatments with remarkable accuracy. Moreover computer simulations of a naive learning model were used, ex ante, to predict the observed differences in the time paths of average prices.
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Bibliographic InfoPaper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 336.
Length: 30 pages
Date of creation: Jan 2000
Date of revision:
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Web page: http://www.virginia.edu/economics/home.html
laboratory experiments; simulation; decision error; learning; logit equilibrium.;
Other versions of this item:
- C. Monica Capra & Jacob K Goeree & Rosario Gomez & Charles A Holt, 2002. "Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 613-636, August.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
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