IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v18y2000i1p7-22.html
   My bibliography  Save this article

Price competition and market concentration: an experimental study

Author

Listed:
  • Dufwenberg, Martin
  • Gneezy, Uri

Abstract

The classical price competition model (named after Bertrand), prescribes that in equilibrium prices are equal to marginal costs. Moreover, prices do not depend on the number of competitors. Since this outcome is not in line with real-life observations, it is known as the Bertrand Paradox". Many theoretical problems with the original model have been considered as an explanation of the paradox in the literature. In this paper we experimentally investigate a model which is immune to the theoretical critique of the original model. We find, nevertheless, that the outcome does depend on the number of competitors: the Bertrand solution does not predict well when the number of competitors is two, but after some opportunities for learning are provided it tends to predict well when the number of competitors is three or four. A bounded rationality explanation of this is suggested.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
  • Handle: RePEc:eee:indorg:v:18:y:2000:i:1:p:7-22
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167-7187(99)00031-4
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    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. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
    2. Fudenberg, Drew & Levine, David, 1998. "Learning in games," European Economic Review, Elsevier, vol. 42(3-5), pages 631-639, May.
    3. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
    4. James W. Friedman, 1965. "An Experimental Study of Cooperative Duopoly," Cowles Foundation Discussion Papers 192, Cowles Foundation for Research in Economics, Yale University.
    5. Dan Alger, 1987. "Laboratory Tests of Equilibrium Predictions with Disequilibrium Data," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 105-145.
    6. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215.
    7. Hoggatt, Austin C & Friedman, James W & Gill, Shlomo, 1976. "Price Signaling in Experimental Oligopoly," American Economic Review, American Economic Association, vol. 66(2), pages 261-266, May.
    8. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, March.
    9. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    10. Drew Fudenberg & David K. Levine, 1998. "The Theory of Learning in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061945.
    11. Plott, Charles R., 1989. "An updated review of industrial organization: Applications of experimental methods," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 19, pages 1109-1176, Elsevier.
    12. Plott, Charles R, 1982. "Industrial Organization Theory and Experimental Economics," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1485-1527, December.
    13. 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. Subhasish Dugar & Arnab Mitra, 2016. "Bertrand Competition With Asymmetric Marginal Costs," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1631-1647, July.
    2. Martini, Gianmaria, 2003. "Complexity and individual rationality in a dynamic duopoly: an experimental study," Research in Economics, Elsevier, vol. 57(4), pages 345-370, December.
    3. Dufwenberg, Martin & Gneezy, Uri, 2002. "Information disclosure in auctions: an experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 48(4), pages 431-444, August.
    4. Dufwenberg, Martin & Gneezy, Uri, 1999. "Procurement and Information Feedback," Research Papers in Economics 2000:2, Stockholm University, Department of Economics.
    5. Waters, George A., 2009. "Chaos in the cobweb model with a new learning dynamic," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1201-1216, June.
    6. Carlos Alós-Ferrer & Georg Kirchsteiger & Markus Walzl, 2010. "On the Evolution of Market Institutions: The Platform Design Paradox," Economic Journal, Royal Economic Society, vol. 120(543), pages 215-243, March.
    7. Sandholm,W.H., 2003. "Excess payoff dynamics, potential dynamics, and stable games," Working papers 5, Wisconsin Madison - Social Systems.
    8. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    9. Michael Foley & Rory Smead & Patrick Forber & Christoph Riedl, 2021. "Avoiding the bullies: The resilience of cooperation among unequals," PLOS Computational Biology, Public Library of Science, vol. 17(4), pages 1-18, April.
    10. Michel BenaÔm & J–rgen W. Weibull, 2003. "Deterministic Approximation of Stochastic Evolution in Games," Econometrica, Econometric Society, vol. 71(3), pages 873-903, May.
    11. Mengel, Friederike, 2014. "Learning by (limited) forward looking players," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 59-77.
    12. Nobuyuki Hanaki, 2007. "Individual and Social Learning," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 421-421, May.
    13. Sonnemans, Joep & Hommes, Cars & Tuinstra, Jan & van de Velden, Henk, 2004. "The instability of a heterogeneous cobweb economy: a strategy experiment on expectation formation," Journal of Economic Behavior & Organization, Elsevier, vol. 54(4), pages 453-481, August.
    14. Apesteguia, Jose & Huck, Steffen & Oechssler, Jorg, 2007. "Imitation--theory and experimental evidence," Journal of Economic Theory, Elsevier, vol. 136(1), pages 217-235, September.
    15. Kyle Hampton & Katerina Sherstyuk, 2012. "Demand shocks, capacity coordination, and industry performance: lessons from an economic laboratory," RAND Journal of Economics, RAND Corporation, vol. 43(1), pages 139-166, March.
    16. Maskin, Eric & Sjostrom, Tomas, 2002. "Implementation theory," Handbook of Social Choice and Welfare, in: K. J. Arrow & A. K. Sen & K. Suzumura (ed.), Handbook of Social Choice and Welfare, edition 1, volume 1, chapter 5, pages 237-288, Elsevier.
    17. Alexander Aurell & Gustav Karreskog, 2020. "Stochastic Stability of a Recency Weighted Sampling Dynamic," Papers 2009.12910, arXiv.org, revised Jun 2021.
    18. Kyle Hyndman & Antoine Terracol & Jonathan Vaksmann, 2009. "Learning and sophistication in coordination games," Experimental Economics, Springer;Economic Science Association, vol. 12(4), pages 450-472, December.
    19. Blavatskyy, Pavlo, 2018. "Oligopolistic price competition with a continuous demand," Mathematical Social Sciences, Elsevier, vol. 93(C), pages 123-131.
    20. Berger, Ulrich & Hofbauer, Josef, 2006. "Irrational behavior in the Brown-von Neumann-Nash dynamics," Games and Economic Behavior, Elsevier, vol. 56(1), pages 1-6, July.

    More about this item

    JEL classification:

    • 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

    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:indorg:v:18:y:2000:i:1:p:7-22. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    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/inca/505551 .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.