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Capacity precommitment and price transparency platforms. Theoretical benchmark and experimental evidence

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

Abstract

Price transparency in the sense of ‘more information for customers’ is known to increase efficiency. However, the introduction of price transparency platforms does not only providemore information for customers but also for rival firms—who may (mis)use the legal information channel to collude. We experimentally investigate transparency platforms in the context of a capacity-then-price setting game. Price transparency is implemented by allowing firms to send non-binding price messages after capacity but before price choices. As such messages are cheap talk they do not affect the subgame perfect equilibrium of the game. In our experiment, however, we find collusive price choices when price messages are possible, especially when they are truthful. While we find strong support for the theoretically predicted negative relation between capacities and prices, participants frequently install excessive capacities, which, in turn, induce collusive pricing behavior.

Suggested Citation

  • Stadler, Manfred & Güth, Werner & Zaby, Alexandra, 2016. "Capacity precommitment and price transparency platforms. Theoretical benchmark and experimental evidence," Annual Conference 2016 (Augsburg): Demographic Change 145515, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145515
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    File URL: https://www.econstor.eu/bitstream/10419/145515/1/VfS_2016_pid_6318.pdf
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    References listed on IDEAS

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    1. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
    2. Ola Andersson & Erik Wengström, 2007. "Do Antitrust Laws Facilitate Collusion? Experimental Evidence on Costly Communication in Duopolies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 321-339, June.
    3. Charness, Gary, 2000. "Self-Serving Cheap Talk: A Test Of Aumann's Conjecture," Games and Economic Behavior, Elsevier, vol. 33(2), pages 177-194, November.
    4. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-122, February.
    5. Crawford, Vincent, 1998. "A Survey of Experiments on Communication via Cheap Talk," Journal of Economic Theory, Elsevier, vol. 78(2), pages 286-298, February.
    6. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    7. Matthew Rabin & Georg Weizsacker, 2009. "Narrow Bracketing and Dominated Choices," American Economic Review, American Economic Association, vol. 99(4), pages 1508-1543, September.
    8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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    More about this item

    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
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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