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Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition

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Listed:
  • C. Monica Capra
  • Jacob K. Goeree
  • Rosario Gomez
  • Charles A. Holt

Abstract

This paper considers a duopoly price-choice game in which the unique Nash equilibrium is the Bertrand outcome. Price competition, however, is imperfect in the sense that the market share of the high-price firm is not zero. Economic intuition suggests that price levels should be positively related to the market share of the high-price firm. Although this relationship is not predicted by standard game theory, it is implied by a generalization of the Nash equilibrium that results when players make noisy (logit) best responses to expected payoff differences. This logit equilibrium model was used to design a laboratory experiment with treatments that correspond to changing the market share of the high-price firm. The model predicts the final-period price averages for both treatments with remarkable accuracy. Moreover computer simulations of a naive learning model were used, ex ante, to predict the observed differences in the time paths of average prices.

Suggested Citation

  • C. Monica Capra & Jacob K. Goeree & Rosario Gomez & Charles A. Holt, 2000. "Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition," Virginia Economics Online Papers 336, University of Virginia, Department of Economics.
  • Handle: RePEc:vir:virpap:336
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    References listed on IDEAS

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    More about this item

    Keywords

    laboratory experiments; simulation; decision error; learning; logit equilibrium.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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