IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v50y2015icp62-77.html
   My bibliography  Save this article

PQ strategies in monopolistic competition: Some insights from the lab

Author

Listed:
  • Assenza, Tiziana
  • Grazzini, Jakob
  • Hommes, Cars
  • Massaro, Domenico

Abstract

We present results from 50-rounds experimental markets in which firms decide repeatedly both on price and quantity of a perishable good. The experiment is designed to study the price–quantity setting behavior of subjects acting as firms in monopolistic competition. In the implemented treatments subjects are asked to make both production and pricing decisions given different information sets. We investigate how subjects decide on prices and quantities in response to signals from the firms׳ internal conditions, i.e., individual profits, excess demand, and excess supply, and the market environment, i.e., aggregate price level. We find persistent heterogeneity in individual behavior, with about 46% of market followers, 28% profit-adjusters and 26% demand adjusters. Nevertheless, prices and quantities tend to converge to the monopolistically competitive equilibrium and we find that subjects׳ behavior is well described by learning heuristics.

Suggested Citation

  • Assenza, Tiziana & Grazzini, Jakob & Hommes, Cars & Massaro, Domenico, 2015. "PQ strategies in monopolistic competition: Some insights from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 50(C), pages 62-77.
    • Handle: RePEc:eee:dyncon:v:50:y:2015:i:c:p:62-77
    DOI: 10.1016/j.jedc.2014.08.017
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165188914002061
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jedc.2014.08.017?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Douglas D. Davis & Korenok Oleg, 2010. "Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis," Working Papers 1003, VCU School of Business, Department of Economics, revised Jun 2011.
    2. repec:ctc:serie1:def0005 is not listed on IDEAS
    3. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2000. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 39-57, January.
    4. Pesaran, M Hashem & Smith, Richard J, 1994. "A Generalized R[superscript]2 Criterion for Regression Models Estimated by the Instrumental Variables Method," Econometrica, Econometric Society, vol. 62(3), pages 705-710, May.
    5. Heemeijer, Peter & Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan, 2009. "Price stability and volatility in markets with positive and negative expectations feedback: An experimental investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1052-1072, May.
    6. repec:ctc:serie1:def4 is not listed on IDEAS
    7. repec:ctc:serie1:def7 is not listed on IDEAS
    8. Mattia Guerini, 2013. "Is the Friedman Rule Stabilizing? Some Unpleasant Results in a Heterogeneous Expectations Framework," DISCE - Working Papers del Dipartimento di Economia e Finanza def003, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    9. repec:ctc:serie1:def0009 is not listed on IDEAS
    10. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, Decembrie.
    11. Sobbrio, Francesco, 2014. "Citizen-editors' endogenous information acquisition and news accuracy," Journal of Public Economics, Elsevier, vol. 113(C), pages 43-53.
    12. Daniel Cracau & Benjamin Franz, 2012. "An experimental study of mixed strategy equilibria in simultaneous price-quantity games," FEMM Working Papers 120017, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    13. Assenza, T. & Heemeijer, P. & Hommes, C.H. & Massaro, D., 2011. "Individual Expectations and Aggregate Macro Behavior," CeNDEF Working Papers 11-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    14. repec:ctc:serie1:def0002 is not listed on IDEAS
    15. Jordi Brandts & Pablo Guillen, 2007. "Collusion And Fights In An Experiment With Price‐Setting Firms And Advance Production," Journal of Industrial Economics, Wiley Blackwell, vol. 55(3), pages 453-473, September.
    16. repec:ctc:serie1:def3 is not listed on IDEAS
    17. Cinzia Di Novi & Elenka Brenna, 2013. "Is caring for elderly parents detrimental for women�s mental health? The influence of the European North-South gradient," Working Papers 2013:23, Department of Economics, University of Venice "Ca' Foscari".
    18. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    19. repec:ctc:serie1:def0006 is not listed on IDEAS
    20. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    21. Paul Bingley & Lorenzo Cappellari, 2019. "Correlation of Brothers' Earnings and Intergenerational Transmission," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 370-383, May.
    22. Andrews, Donald W K & Monahan, J Christopher, 1992. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 60(4), pages 953-966, July.
    23. Massimo Bordignon & Matteo Gamalerio & Gilberto Turati, 2013. "Decentralization, Vertical Fiscal Imbalance, and Political Selection," DISCE - Working Papers del Dipartimento di Economia e Finanza def002, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    24. James W. Friedman, 1988. "On the Strategic Importance of Prices versus Quantities," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 607-622, Winter.
    25. repec:ctc:serie1:def9 is not listed on IDEAS
    26. 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, vol. 13(1), pages 111-122, February.
    27. Davis, Douglas & Korenok, Oleg, 2011. "Nominal shocks in monopolistically competitive markets: An experiment," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 578-589.
    28. Elenka Brenna & Federico Spandonaro, 2014. "Does federalism induce patients’ mobility across regions? Evidence from the Italian experience," DISCE - Working Papers del Dipartimento di Economia e Finanza def009, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    29. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    30. repec:ctc:serie1:def0007 is not listed on IDEAS
    31. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
    32. Tiziana Assenza & William A. Brock & Cars H. Hommes, 2013. "Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts," Tinbergen Institute Discussion Papers 13-205/II, Tinbergen Institute.
    33. repec:ctc:serie1:def0003 is not listed on IDEAS
    34. Elenka Brenna & Cinzia Di Novi, 2013. "Is caring for elderly parents detrimental to women’s mental health? The influence of the European North-South gradient," DISCE - Working Papers del Dipartimento di Economia e Finanza def004, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    35. repec:ctc:serie1:def2 is not listed on IDEAS
    36. Colombo, Luca & Dawid, Herbert, 2014. "Strategic location choice under dynamic oligopolistic competition and spillovers," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 288-307.
    37. Osborne, Martin J. & Pitchik, Carolyn, 1986. "Price competition in a capacity-constrained duopoly," Journal of Economic Theory, Elsevier, vol. 38(2), pages 238-260, April.
    38. repec:ctc:serie1:def8 is not listed on IDEAS
    39. repec:ctc:serie1:def1 is not listed on IDEAS
    40. repec:ctc:serie1:def6 is not listed on IDEAS
    41. Daniela Parisi, 2014. "Is There Room for 'Fear' as a Human Passion in the Work by Adam Smith?," DISCE - Working Papers del Dipartimento di Economia e Finanza def008, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    42. repec:ctc:serie1:def5 is not listed on IDEAS
    43. repec:ctc:serie1:def0001 is not listed on IDEAS
    44. Davis, Douglas D., 2002. "Strategic interactions, market information and predicting the effects of mergers in differentiated product markets," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1277-1312, November.
    45. Maskin, Eric, 1986. "The Existence of Equilibrium with Price-Setting Firms," American Economic Review, American Economic Association, vol. 76(2), pages 382-386, May.
    46. repec:ctc:serie1:def0008 is not listed on IDEAS
    47. repec:ctc:serie1:def0004 is not listed on IDEAS
    48. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ctc:serie1:def11 is not listed on IDEAS
    2. repec:ctc:serie1:def20 is not listed on IDEAS
    3. Salvatore Perdichizzi, 2017. "The impact of ECBs conventional and unconventional monetary policies on European banking indexes returns," DISCE - Working Papers del Dipartimento di Economia e Finanza def059, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    4. Russel Davidson & Andrea Monticini, 2014. "Heteroskedasticity-and-Autocorrelation-Consistent Bootstrapping," DISCE - Working Papers del Dipartimento di Economia e Finanza def012, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    5. Grazzini, Jakob & Spelta, Alessandro, 2022. "An empirical analysis of the global input–output network and its evolution," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 594(C).
    6. Irene Torrini & Claudio Lucifora & Antonio Russo, 2022. "The Long-Term Effects of Hospitalization on Health Care Expenditures: An Empirical Analysis for the Young-Old Population," DISCE - Working Papers del Dipartimento di Economia e Finanza def117, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    7. Rosario Crinò & Laura Ogliari, 2015. "Financial Frictions, Product Quality, and International Trade," DISCE - Working Papers del Dipartimento di Economia e Finanza def030, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    8. Boitani, Andrea & Punzo, Chiara, 2019. "Banks’ leverage behaviour in a two-agent new Keynesian model," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 347-359.
    9. Checchi, Daniele & Fenizia, Alessandra & Lucifora, Claudio, 2021. "Public Sector Jobs: Working in the Public Sector in Europe and the US," IZA Discussion Papers 14514, Institute of Labor Economics (IZA).
    10. Russell Davidson & Andrea Monticini, 2018. "Improvements in Bootstrap Inference," DISCE - Working Papers del Dipartimento di Economia e Finanza def070, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    11. Luca Fiorito & Cosma Orsi, 2016. "Survival Value And A Robust, Practical, Joyless Individualism: Thomas Nixon Carver, Social Justice, And Eugenics," DISCE - Working Papers del Dipartimento di Economia e Finanza def044, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    12. Marco Botta & Luca Colombo, 2016. "Macroeconomic and Institutional Determinants of Capital Structure Decisions," DISCE - Working Papers del Dipartimento di Economia e Finanza def038, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    13. Giuntella, Osea & Rotunno, Lorenzo & Stella, Luca, 2021. "Trade Shocks, Fertility, and Marital Behavior," IZA Discussion Papers 14224, Institute of Labor Economics (IZA).
    14. Carsten Krabbe Nielsen, 2009. "Rational Overconfidence and Social Security," Discussion Paper Series 0916, Institute of Economic Research, Korea University.
    15. Angelo Baglioni & Andrea Boitani & Massimo Bordignon, 2016. "Labor Mobility and Fiscal Policy in a Currency Union," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(4), pages 371-406, December.
    16. Fanfani, Bernardo, 2022. "Tastes for discrimination in monopsonistic labour markets," Labour Economics, Elsevier, vol. 75(C).
    17. Elenka Brenna & Lara Gitto, 2018. "Adult education, the use of Information and Communication Technologies and the impact on quality of life: a case study," DISCE - Working Papers del Dipartimento di Economia e Finanza def073, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    18. Chiara Punzo & Giulia Rivolta, 2022. "Money versus debt financed regime: Evidence from an estimated DSGE model," DISCE - Working Papers del Dipartimento di Economia e Finanza def120, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    19. Valentina Colombo & Alessia Paccagnini, 2024. "Uncertainty and the Federal Reserve’s Balance Sheet Monetary Policy," DISCE - Working Papers del Dipartimento di Economia e Finanza def131, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    20. Cottini Elena & Ghinetti Paolo, 2017. "Is it the Way You Live or the Job You Have? Health Effects of Lifestyles and Working Conditions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(3), pages 1-20, July.
    21. Bertoni, Marco & Brunello, Giorgio & Cappellari, Lorenzo, 2017. "Parents, Siblings and Schoolmates: The Effects of Family-School Interactions on Educational Achievement and Long-Term Labor Market Outcomes," IZA Discussion Papers 11200, Institute of Labor Economics (IZA).
    22. Giuntella, Osea & Lonsky, Jakub & Mazzonna, Fabrizio & Stella, Luca, 2021. "Immigration policy and immigrants’ sleep. Evidence from DACA," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 1-12.

    More about this item

    Keywords

    Laboratory experiments; Monopolistic competition; Price–quantity behavior;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:50:y:2015:i:c:p:62-77. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jedc .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.