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Second Mover Advantage and Bertrand Dynamic Competition: An Experiment

  • S.N. O'Higgins

    ()

  • Arturo Palomba

    ()

  • Patrizia Sbriglia

    ()

In this paper we provide an experimental test of a dynamic Bertrand duopolistic model, where firms move sequentially and their informational setting varies across different designs. Our experiment is composed of three treatments. In the first treatment, subjects receive information only on the costs and demand parameters and on the price’ choices of their opponent in the market in which they are positioned (matching is fixed); in the second and third treatments, subjects are also informed on the behaviour of players who are not directly operating in their market. Our aim is to study whether the individual behaviour and the process of equilibrium convergence are affected by the specific informational setting adopted. In all treatments we selected students who had previously studied market games and industrial organization, conjecturing that the specific participants’ expertise decreased the chances of imitation in treatment II and III. However, our results prove the opposite: the extra information provided in treatment II and III strongly affects the long run convergence to the market equilibrium. In fact, whilst in the first session, a high proportion of markets converge to the Nash-Bertrand symmetric solution, we observe that a high proportion of markets converge to more collusive outcomes in treatment II and more competitive outcomes in treatment III. By the same token, players’ profits significantly differ in three settings. An interesting point of our analysis relates to the assessment of the individual behavioural rules in the second and third treatments. When information on the behaviour of participants on uncorrelated markets is provided, players begin to adopt mixed behavioural rules, in the sense that they follow myopic best reply rules as long as their profits are in line with the average profits on all markets, and , when their gains fall below that threshold, they start imitating successful strategies adopted on other markets.

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Paper provided by University of Siena in its series Labsi Experimental Economics Laboratory University of Siena with number 028.

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Date of creation: May 2010
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Handle: RePEc:usi:labsit:028
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  1. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1997. "Learning in Cournot Oligopoly - An Experiment," Game Theory and Information 9707009, EconWPA, revised 22 Jul 1997.
  2. Wieland Müller & Yossi Spiegel & Werner Güth, . "Noisy leadership: An experimental approach," Papers on Strategic Interaction 2002-10, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
  4. Amir, Rabah & Stepanova, Anna, 2006. "Second-mover advantage and price leadership in Bertrand duopoly," Games and Economic Behavior, Elsevier, vol. 55(1), pages 1-20, April.
  5. Eric van Damme & Sjaak Hurkens, 1998. "Endogenous price leadership," Economics Working Papers 289, Department of Economics and Business, Universitat Pompeu Fabra.
  6. 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.
  7. Huck, Steffen & Müller, Wieland & Normann, Hans-Theo, 1999. "Stackelberg beats Cournot: On collusion and efficiency in experimental markets," SFB 373 Discussion Papers 1999,32, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  8. Gal-Or, Esther, 1987. "First Mover Disadvantages with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 54(2), pages 279-92, April.
  9. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October.
  10. Mark Armstrong & Steffen Huck, 2010. "Behavioral Economics as Applied to Firms: A Primer," CESifo Working Paper Series 2937, CESifo Group Munich.
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