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Coordination failure in capacity-then-price-setting games

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  • Güth, Werner
  • Stadler, Manfred
  • Zaby, Alexandra

Abstract

In capacity-then-price-setting games, soft capacity constraints are planned sales amounts where producing above capacity is possible but more costly. While the subgame perfect equilibrium predicts equal prices, experimental evidence often reveals price discrepancies. This failure to coordinate on equal prices can imply losses, especially when serving demand is obligatory. We compare coordination failure with efficient rationing as well as with compulsory serving of demand, and additionally allow for simultaneous and sequential capacity choices. These treatments lead to a varying severity of the threat of losses. Our experimental results show that (possible) coordination failure affects behavior through two channels: via anticipating as well as via reacting to a loss. While capacities increase in anticipation of losses, prices increase when anticipating losses but decrease after experiencing losses. Coordination failures are more probable after subjects experienced a loss.

Suggested Citation

  • Güth, Werner & Stadler, Manfred & Zaby, Alexandra, 2019. "Coordination failure in capacity-then-price-setting games," University of Tübingen Working Papers in Business and Economics 116, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
  • Handle: RePEc:zbw:tuewef:116
    DOI: 10.15496/publikation-26973
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    More about this item

    Keywords

    capacity-then-price competition; loss avoidance; path dependence; sequentiality of decisions; intra-play communication;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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