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An experiment on spatial price competition

  • Orzen, Henrik
  • Sefton, Martin

This paper investigates price competition in a segmented market. Each segment contains one seller and one consumer, and consumers incur transportation costs when they buy from a seller located in another segment. We consider several competing theoretical solutions to this game and compare the outcomes of a laboratory experiment against these. We find that mixed strategy equilibrium predictions from the analysis of a static model perform better than alternative benchmarks in organizing the data. In particular we observe persistent price dispersion, we find that larger markets are more competitive, and we find that competitive pressures in large markets preclude sellers from exploiting higher consumers' willingness to pay.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 3 (May)
Pages: 716-729

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Handle: RePEc:eee:indorg:v:26:y:2008:i:3:p:716-729
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
  2. Dufwenberg, Martin & Gneezy, Uri, 1999. "Price Competition and Market Concentration: An experimental Study," Research Papers in Economics 1999:4, Stockholm University, Department of Economics.
  3. Eaton, B Curtis & Lipsey, Richard G, 1978. "Freedom of Entry and the Existence of Pure Profit," Economic Journal, Royal Economic Society, vol. 88(351), pages 455-69, September.
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  5. Kübler, D. & Müller, W., 2002. "Simultaneous and sequential price competition on heterogeneous duopoly markets : Experimental evidence," Other publications TiSEM f2d9029e-d44e-48af-8187-f, Tilburg University, School of Economics and Management.
  6. Collins, Richard & Sherstyuk, Katerina, 2000. "Spatial Competition with Three Firms: An Experimental Study," Economic Inquiry, Western Economic Association International, vol. 38(1), pages 73-94, January.
  7. Peeters,Ronald & Strobel,Martin, 2005. "Differentiated Product Markets: An Experimental Test of Two Equilibrium Concepts," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. Garcia-Gallego, Aurora & Georgantzis, Nikolaos, 2001. "Multiproduct activity in an experimental differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 493-518, March.
  9. Fisher, Eric ON. & Wilson, Charles A., 1995. "Price competition between two international firms facing tariffs," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 67-87, March.
  10. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1998. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," Industrial Organization 9803004, EconWPA.
  11. B. Curtis Eaton, 1972. "Spatial Competition Revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 5(2), pages 268-78, May.
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  17. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  18. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
  19. Reinhard Selten & Jose Apesteguia, 2002. "Experimentally Observed Imitation and Cooperation in Price Competition on the Circle," Bonn Econ Discussion Papers bgse19_2002, University of Bonn, Germany.
  20. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  21. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  22. Brown Kruse, Jamie & Schenk, David J., 2000. "Location, cooperation and communication: An experimental examination," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 59-80, January.
  23. Camacho-Cuena, Eva & Garcia-Gallego, Aurora & Georgantzis, Nikolaos & Sabater-Grande, Gerardo, 2005. "Buyer-seller interaction in experimental spatial markets," Regional Science and Urban Economics, Elsevier, vol. 35(2), pages 89-108, March.
  24. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  25. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2004. "Two are few and four are many: number effects in experimental oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 435-446, April.
  26. Brown, James N & Rosenthal, Robert W, 1990. "Testing the Minimax Hypothesis: A Re-examination of O'Neill's Game Experiment," Econometrica, Econometric Society, vol. 58(5), pages 1065-81, September.
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