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An Experiment on Spatial Price Competition

  • Henrik Orzen

    (School of Economics, University of Nottingham)

  • Martin Sefton

    ()

    (School of Economics, University of Nottingham)

We conduct an experiment on price competition in a segmented market. Each segment contains one seller and one consumer, and consumers incur transportation costs when they buy from a seller located in another segment. We observe persistent price dispersion in our experimental markets with the implication that consumers frequently switch suppliers. We find that larger markets are more competitive, and that competitive pressures in large markets preclude sellers from exploiting higher consumers’ willingness to pay. We compare laboratory outcomes against several theoretical benchmarks. We find that mixed strategy equilibrium predictions from the analysis of a static model perform better than alternative benchmarks in organizing the data.

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Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2006-14.

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Date of creation: Sep 2006
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Handle: RePEc:cdx:dpaper:2006-14
Contact details of provider: Postal: University Park, Nottingham NG7 2RD
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Web page: http://www.nottingham.ac.uk/economics/cedex/

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  1. Brown Kruse, Jamie & Schenk, David J., 2000. "Location, cooperation and communication: An experimental examination," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 59-80, January.
  2. Brown, James N & Rosenthal, Robert W, 1990. "Testing the Minimax Hypothesis: A Re-examination of O'Neill's Game Experiment," Econometrica, Econometric Society, vol. 58(5), pages 1065-81, September.
  3. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1998. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," Industrial Organization 9803004, EconWPA.
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  6. B. Curtis Eaton, 1972. "Spatial Competition Revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 5(2), pages 268-78, May.
  7. Kübler, D. & Müller, W., 2002. "Simultaneous and sequential price competition on heterogeneous duopoly markets : Experimental evidence," Other publications TiSEM f2d9029e-d44e-48af-8187-f, Tilburg University, School of Economics and Management.
  8. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  9. Timothy N. Cason & Daniel Friedman, 2000. "Buyer Search and Price Dispersion: A Laboratory Study," Econometric Society World Congress 2000 Contributed Papers 1549, Econometric Society.
  10. Huck, S. & Müller, W. & Vriend, N.J., 2002. "The East End, the West End and King's Cross : On clustering in the four-player Hotelling game," Other publications TiSEM 1e3e12cd-ae62-49dc-8f43-1, Tilburg University, School of Economics and Management.
  11. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  12. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  13. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
  14. Collins, Richard & Sherstyuk, Katerina, 1999. "Spatial Competition with Three Firms: An Experimental Study," Working Papers 1057, California Institute of Technology, Division of the Humanities and Social Sciences.
  15. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
  16. Fisher, Eric ON. & Wilson, Charles A., 1995. "Price competition between two international firms facing tariffs," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 67-87, March.
  17. Morgan, John & Orzen, Henrik & Sefton, Martin, 2006. "An experimental study of price dispersion," Games and Economic Behavior, Elsevier, vol. 54(1), pages 134-158, January.
  18. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
  19. Reinhard Selten & Jose Apesteguia, 2002. "Experimentally Observed Imitation and Cooperation in Price Competition on the Circle," Bonn Econ Discussion Papers bgse19_2002, University of Bonn, Germany.
  20. Garcia-Gallego, Aurora & Georgantzis, Nikolaos, 2001. "Multiproduct activity in an experimental differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 493-518, March.
  21. repec:cup:cbooks:9780521800952 is not listed on IDEAS
  22. Peeters,Ronald & Strobel,Martin, 2005. "Differentiated Product Markets: An Experimental Test of Two Equilibrium Concepts," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  23. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  24. Camacho-Cuena, Eva & Garcia-Gallego, Aurora & Georgantzis, Nikolaos & Sabater-Grande, Gerardo, 2005. "Buyer-seller interaction in experimental spatial markets," Regional Science and Urban Economics, Elsevier, vol. 35(2), pages 89-108, March.
  25. Steffen Huck & Wieland M¸ller, 2002. "The East End, the West End, and King's Cross: on Clustering in the Four-Player Hotelling Game," Economic Inquiry, Western Economic Association International, vol. 40(2), pages 231-240, April.
  26. Eaton, B Curtis & Lipsey, Richard G, 1978. "Freedom of Entry and the Existence of Pure Profit," Economic Journal, Royal Economic Society, vol. 88(351), pages 455-69, September.
  27. repec:cup:cbooks:9780521805001 is not listed on IDEAS
  28. Brown-Kruse, Jamie & Cronshaw, Mark B & Schenk, David J, 1993. "Theory and Experiments on Spatial Competition," Economic Inquiry, Western Economic Association International, vol. 31(1), pages 139-65, January.
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