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Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition

Author

Listed:
  • C. Monica Capra

    (Washington and Lee University, USA)

  • Jacob K Goeree

    (University of Virginia, USA, and University of Amsterdam, The Netherlands)

  • Rosario Gomez

    (University of Malaga, Spain; University of Virginia, USA)

  • Charles A Holt

    (University of Virginia, USA)

Abstract

We consider a duopoly pricing game with a unique Bertrand-Nash equilibrium. The high-price firm has a nonvanishing market share, however, and intuition suggests that observed prices may be positively related to this market share. This relationship is implied by a model in which players make noisy (logit) best responses to expected payoff differences. The resulting logit equilibrium model was used to design an experiment in which the high-price firm's market share varies. The model accurately predicts the final-period price averages. A naive learning model predicts the observed differences in the time paths of average prices. Copyright Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association

Suggested Citation

  • C. Monica Capra & Jacob K Goeree & Rosario Gomez & Charles A Holt, 2002. "Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 613-636, August.
  • Handle: RePEc:ier:iecrev:v:43:y:2002:i:3:p:613-636
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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