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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.

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  • 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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    6. Dimitrios Xefteris & Iván Barreda-Tarrazona & Aurora García-Gallego & Nikolaos Georgantzis, 2018. "Catalog Competition: Equilibrium Characterization and experimental evidence," Working Papers 2018/08, Economics Department, Universitat Jaume I, Castellón (Spain).
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    12. Andrew Smyth, 2017. "How Product Innovation Can Affect Price Collusion," Working Papers 17-26, Chapman University, Economic Science Institute.
    13. 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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