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Differentiated Product Markets: An Experimental Test of Two Equilibrium Concepts

  • Peeters,Ronald
  • Strobel,Martin

    (METEOR)

In markets with differentiated products Bertrand-Nash equilibria in pure strategies may not exist. Mixed strategies are difficult to calculate. For these cases Morgan and Shy (2000) suggest an alternative solution concept, the undercut-proof equilibrium (UPE). While the Nash-equilibrium is motivated by the question of how ones own behavior influences one''s payoff, the UPE is motivated by the question of how others'' behavior influence one''s payoff. We report on an experiment where we test these two concepts with respect to their comparative statics. Moreover we investigate the nature of subjects'' underlying thinking process. Our results provide strong evidence against the UPE and in favor of Bertrand-Nash.

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 020.

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Date of creation: 2005
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Handle: RePEc:unm:umamet:2005020
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  1. Kubler, Dorothea & Muller, Wieland, 2002. "Simultaneous and sequential price competition in heterogeneous duopoly markets: experimental evidence," International Journal of Industrial Organization, Elsevier, vol. 20(10), pages 1437-1460, December.
  2. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2000. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 39-57, January.
  3. 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.
  4. Bester, Helmut, 1992. "Bertrand Equilibrium in a Differentiated Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 433-48, May.
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