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The Strategies Behind Their Actions: A Method To Infer Repeated-Game Strategies And An Application To Buyer Behavior

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  • Jim Engle-Warnick

    ()

  • Bradley Ruffle

    ()

Abstract

We introduce a Bayesian method to infer repeted-game strategies in the form of if-then statements that best describe individuals' observed actions. We apply this method to buyer behavior in posted-offer market experiments. While the strategies of one-quarter of the buyers in our experiments correspond to the game-theoretic prediction of passive price-taking, for three-quarters of the buyers we infer repeated-game strategies that condition on time, price, and combinations of time and price. Our analysis fills a gap in a literature that studies the convergence of pricing behavior in posted-offer markets but has not addressed the market as a repeated game. We propose that strategy inference should at least complement existing methods of statistical inference on observed strategic behavior.

Suggested Citation

  • Jim Engle-Warnick & Bradley Ruffle, 2006. "The Strategies Behind Their Actions: A Method To Infer Repeated-Game Strategies And An Application To Buyer Behavior," Departmental Working Papers 2005-04, McGill University, Department of Economics.
  • Handle: RePEc:mcl:mclwop:2005-04
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    File URL: http://www.mcgill.ca/files/economics/thestrategiesbehind.pdf
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    References listed on IDEAS

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    1. El-Gamal, Mahmoud A. & Grether, David M., 1995. "Are People Bayesian? Uncovering Behavioral Strategies," Working Papers 919, California Institute of Technology, Division of the Humanities and Social Sciences.
    2. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
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    5. Engle-Warnick, Jim, 2003. "Inferring strategies from observed actions: a nonparametric, binary tree classification approach," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2151-2170.
    6. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
    7. John F. Geweke & Michael P. Keane, 1996. "Bayesian inference for dynamic choice models without the need for dynamic programming," Working Papers 564, Federal Reserve Bank of Minneapolis.
    8. Costa-Gomes, Miguel & Crawford, Vincent P & Broseta, Bruno, 2001. "Cognition and Behavior in Normal-Form Games: An Experimental Study," Econometrica, Econometric Society, vol. 69(5), pages 1193-1235, September.
    9. Selten, Reinhard & Stoecker, Rolf, 1986. "End behavior in sequences of finite Prisoner's Dilemma supergames A learning theory approach," Journal of Economic Behavior & Organization, Elsevier, vol. 7(1), pages 47-70, March.
    10. Manski, Charles F., 2002. "Identification of decision rules in experiments on simple games of proposal and response," European Economic Review, Elsevier, vol. 46(4-5), pages 880-891, May.
    11. Engle-Warnick, Jim, 2003. "Inferring strategies from observed actions: a nonparametric, binary tree classification approach," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2151-2170, September.
    12. John Duffy & Jim Warnick, 1999. "Using Symbolic Regression to Infer Strategies from Experimental Data," Computing in Economics and Finance 1999 1033, Society for Computational Economics.
    13. Jim Engle-Warnick & Bradley Ruffle, 2006. "Buyer Concentration As A Source Of Countervailing Power: Evidence From Experimental Posted-Offer Markets," Departmental Working Papers 2006-12, McGill University, Department of Economics.
    14. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-279, May.
    15. Davis, Douglas D. & Holt, Charles A., 2008. "The Exercise of Market Power in Laboratory Experiments," Handbook of Experimental Economics Results, Elsevier.
    16. Reinhard Selten & Michael Mitzkewitz & Gerald R. Uhlich, 1997. "Duopoly Strategies Programmed by Experienced Players," Econometrica, Econometric Society, vol. 65(3), pages 517-556, May.
    17. Geweke, John & Keane, Michael, 2001. "Computationally intensive methods for integration in econometrics," Handbook of Econometrics,in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 56, pages 3463-3568 Elsevier.
    18. Inderst, Roman & Wey, Christian, 2003. " Bargaining, Mergers, and Technology Choice in Bilaterally Oligopolistic Industries," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 1-19, Spring.
    19. Bradley J. Ruffle, 2005. "Buyer Countervailing Power: A Survey of Experimental Evidence," Working Papers 0512, Ben-Gurion University of the Negev, Department of Economics.
    20. Bradley J. Ruffle, 2000. "Some factors affecting demand withholding in posted-offer markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 529-544.
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    Citations

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    Cited by:

    1. Bradley J. Ruffle, 2005. "Buyer Countervailing Power: A Survey of Experimental Evidence," Working Papers 0512, Ben-Gurion University of the Negev, Department of Economics.
    2. Cabral, Luis & Ozbay, Erkut Y. & Schotter, Andrew, 2014. "Intrinsic and instrumental reciprocity: An experimental study," Games and Economic Behavior, Elsevier, vol. 87(C), pages 100-121.
    3. Engle-Warnick, Jim & Slonim, Robert L., 2004. "The evolution of strategies in a repeated trust game," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 553-573, December.
    4. Todd Kaplan & Bradley Ruffle, 2004. "It's My Turn ... Please, After You: An Experimental Study of Cooperation and Social Conventions," Experimental 0410001, EconWPA.
    5. Engle-Warnick, Jim, 2003. "Inferring strategies from observed actions: a nonparametric, binary tree classification approach," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2151-2170, September.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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