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An experiment on spatial competition with endogenous pricing

  • Barreda-Tarrazona, Iván
  • García-Gallego, Aurora
  • Georgantzís, Nikolaos
  • Andaluz-Funcia, Joaquín
  • Gil-Sanz, Agustín

Hotelling's (1929) principle of minimum differentiation and the alternative prediction that firms will maximally differentiate from their rivals in order to relax price competition have not been explicitly tested so far. We report results from experimental spatial duopolies designed to address this issue. The levels of product differentiation observed are systematically lower than predicted in equilibrium under risk neutrality and compatible with risk aversion. The observed prices are consistent with collusion attempts. Our main findings are robust to variations in three experimental conditions: automated vs. human market sharing rule for ties, individual vs. collective decision making, and even vs. odd number of locations.

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

Volume (Year): 29 (2011)
Issue (Month): 1 (January)
Pages: 74-83

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Handle: RePEc:eee:indorg:v:29:y:2011:i:1:p:74-83
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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