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An experiment on spatial competition with endogenous pricing

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

Abstract

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.

Suggested Citation

  • Barreda-Tarrazona, Iván & García-Gallego, Aurora & Georgantzís, Nikolaos & Andaluz-Funcia, Joaquín & Gil-Sanz, Agustín, 2011. "An experiment on spatial competition with endogenous pricing," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 74-83, January.
  • Handle: RePEc:eee:indorg:v:29:y:2011:i:1:p:74-83
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    References listed on IDEAS

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    Cited by:

    1. Christoph Engel, 2007. "Tacit Collusion. The Neglected Experimental Evidence," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2007_14, Max Planck Institute for Research on Collective Goods, revised Jan 2015.
    2. Buechel, Berno & Klein, Jan, 2014. "Do Consumers' Preferences Really Matter? - A Note on Spatial Competition with Restricted Strategies," MPRA Paper 55288, University Library of Munich, Germany.
    3. Berno Buechel & Jan F. Klein, 2016. "Restrictions in Spatial Competition: The Effects on Firms and Consumers," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 33(1), pages 157-172, August.
    4. Aurélie Bonein & Stéphane Turolla, 2017. "Spatial competition with demand uncertainty: A laboratory experiment," Working Papers SMART - LERECO 17-12, INRA UMR SMART-LERECO.
    5. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2012. "Can competition reduce quality?," NIPE Working Papers 05/2012, NIPE - Universidade do Minho.
    6. Iván Barreda-Tarrazona & Nikolaos Georgantzís & Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2012. "Managerial compensation contracts in quantity-setting duopoly," Working Papers 2012/17, Economics Department, Universitat Jaume I, Castellón (Spain).
    7. Max Albert & Andreas Hildenbrand, 2016. "Industrial Organization and Experimental Economics: How to Learn from Laboratory Experiments," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 33(1), pages 135-156, August.
    8. Wilfred Amaldoss & Woochoel Shin, 2011. "Competing for Low-End Markets," Marketing Science, INFORMS, vol. 30(5), pages 776-788, September.
    9. Barreda-Tarrazona, Iván & Georgantzís, Nikolaos & Manasakis, Constantine & Mitrokostas, Evangelos & Petrakis, Emmanuel, 2016. "Endogenous managerial compensation contracts in experimental quantity-setting duopolies," Economic Modelling, Elsevier, vol. 54(C), pages 205-217.
    10. A. Morone & P. Morone, 2014. "Estimating individual and group preference functionals using experimental data," Theory and Decision, Springer, vol. 77(3), pages 403-422, October.

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