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The Discrete Charm of Nominal Illusion

Author

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  • Fatas, E
  • Morales, A.J.

Abstract

We investigate the emergence and persistence of nominal illusion in an experimental entry game where firms must choose which local market to enter, then compete in prices. All local markets are equivalent in real terms and they only differ in the currency the price competition is run under. Our experimental results show a positive, persistent and monotone effect of the nominal exchange rate on (real) posted prices. We provide an explanation in terms of players simplifying the choice set using discrete grids.

Suggested Citation

  • Fatas, E & Morales, A.J., 2018. "The Discrete Charm of Nominal Illusion," Documentos de Trabajo 16630, Universidad del Rosario.
    • Handle: RePEc:col:000092:016630
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    More about this item

    Keywords

    Price competition; money illusion; experiments; nominal representation;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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