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Excess capacity and pricing in Bertrand-Edgeworth markets: Experimental evidence

  • Fonseca, Miguel A.
  • Normann, Hans-Theo

We conduct experiments testing the relationship between excess capacity and pricing in repeated Bertrand-Edgeworth duopolies and triopolies. We systematically vary the experimental markets between low excess capacity (suggesting monopoly) and no capacity constraints (suggesting perfect competition). Controlling for the number of firms, higher production capacity leads to lower prices. However, the decline in prices as industry capacity rises is less pronounced than predicted by Nash equilibrium, and a model of myopic price adjustments has greater predictive power. With higher capacities, Edgeworth-cycle behavior becomes less pronounced, causing lower prices. Evidence for tacit collusion is limited and restricted to low-capacity duopolies.

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Paper provided by Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 67.

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Date of creation: 2012
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Handle: RePEc:zbw:dicedp:67
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  1. Vital Anderhub & Werner Güth & Ulrich Kamecke & Hans-Theo Normann, 2003. "Capacity Choices and Price Competition in Experimental Markets," Experimental Economics, Springer, vol. 6(1), pages 27-52, June.
  2. Dechenaux, Emmanuel & Kovenock, Dan & Lugovskyy, Volodymry, 2003. "A Comment on “David and Goliath: An Analysis on Asymmetric Mixed-Strategy Games and Experimental Evidence”," Purdue University Economics Working Papers 1162, Purdue University, Department of Economics.
  3. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
  4. Klaus Abbink & Jordi Brandts, 2005. "Collusion in Growing and Shrinking Markets: Empirical Evidence from Experimental Duopolies," Discussion Papers 2005-03, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  5. Morgan, John & Orzen, Henrik & Sefton, Martin, 2006. "An experimental study of price dispersion," Games and Economic Behavior, Elsevier, vol. 54(1), pages 134-158, January.
  6. Joseph J. Doyle, Jr. & Erich Muehlegger & Krislert Samphantharak, 2008. "Edgeworth Cycles Revisited," NBER Working Papers 14162, National Bureau of Economic Research, Inc.
  7. Steve Buchheit & Nick Feltovich, 2011. "Experimental Evidence Of A Sunk‐Cost Paradox: A Study Of Pricing Behavior In Bertrand–Edgeworth Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 317-347, 05.
  8. Dechenaux, Emmanuel & Kovenock, Dan & Lugovskyy, Volodymry, 2003. "Caps on Bidding in All-Pay Auctions: Comments on the Experiments of A. Rapoport and W. Amaldoss," Purdue University Economics Working Papers 1161, Purdue University, Department of Economics.
  9. Foros, Øystein & Steen, Frode, 2008. "Gasoline prices jump up on Mondays: An outcome of aggressive competition?," CEPR Discussion Papers 6783, C.E.P.R. Discussion Papers.
  10. Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
  11. Henrik Orzen, 2006. "Counterintuitive Number Effects in Experimental Oligopolies," Discussion Papers 2006-22, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  12. Muren, Astri, 2000. "Quantity precommitment in an experimental oligopoly market," Journal of Economic Behavior & Organization, Elsevier, vol. 41(2), pages 147-157, February.
  13. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  14. MiguelA. Fonseca & Hans-Theo Normann, 2008. "Mergers, Asymmetries and Collusion: Experimental Evidence," Economic Journal, Royal Economic Society, vol. 118(527), pages 387-400, 03.
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