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Explaining Price Dispersion and Dynamics in Laboratory Bertrand Markets

Author

Listed:
  • Ralph-C. Bayer

    (School of Economics, University of Adelaide)

  • Hang Wu

    (School of Economics, University of Adelaide)

  • Mickey Chan

    (School of Economics, University of Adelaide)

Abstract

This paper develops a quantal-response adaptive learning model which combines sellers' bounded rationality with adaptive belief learning in order to explain price dispersion and dynamics in laboratory Bertrand markets with perfect information. In the model, sellers hold beliefs about their opponents’ strategies and play quantal best responses to these beliefs. After each period, sellers update their beliefs based on the information learned from previous play. Maximum likelihood estimation suggests that when sellers have full past price information, the learning model explains price dispersion within periods and the dynamics across periods. The fit is particularly good if one allows for sellers being risk averse. In contrast, Quantal Response Equilibrium does not organize the data well.

Suggested Citation

  • Ralph-C. Bayer & Hang Wu & Mickey Chan, 2013. "Explaining Price Dispersion and Dynamics in Laboratory Bertrand Markets," School of Economics and Public Policy Working Papers 2013-16, University of Adelaide, School of Economics and Public Policy.
  • Handle: RePEc:adl:wpaper:2013-16
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2013-16.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ralph-C. Bayer & Hang Wu, 2013. "Do We Learn from Our Own Experience or from Observing Others?," School of Economics and Public Policy Working Papers 2013-21, University of Adelaide, School of Economics and Public Policy.

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    More about this item

    Keywords

    Price dispersion; Adaptive Learning; Bounded rationality; Quantal Response Equilibrium.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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