Bertrand-Edgeworth Competition in Experimental Markets

Kruse, Jamie Brown; Rassenti, Stephen; Reynolds, Stan; Smith, Vernon L.

doi:10.2307/2951616

Cited by 93 publications

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“…Holt (1995) surveys the experimental research on posted prices. Davis and Holt (1994) and Kruse, Rassenti, Reynolds, and Smith (1994) study price competition in environments in which the equilibrium prediction involves a price distribution with average prices above marginal cost in the spirit of the first theoretical resolution of the Be rtrand paradox proposed by Edgeworth (1925). Both studies find price dispersion distinct but qualitatively similar to those predicted by Nash equilibrium.…”

Section: Introductionmentioning

confidence: 99%

Price Competition Under Cost Uncertainty: A Laboratory Analysis

Abbink

Brandts

2003

SSRN Journal

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We study the relation between the number of firms and price-cost margins under price competition with uncertainty about competitors' costs. We present results of an experiment in which two, three and four identical firms repeatedly interact in this environment. In line with the theoretical prediction, market prices decrease with the number of firms, but on average stay above marginal costs. Pricing is less aggressive in duopolies than in triopolies and tetrapolies. However, independently from the number of firms, pricing is more aggressive than in the theoretical equilibrium. Both the absolute and the relative surpluses increase with the number of firms. Total surplus is close to the equilibrium level, since enhanced consumer surplus through lower prices is counteracted by occasional displacements of the most efficient firm in production.

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Section: Introductionmentioning

confidence: 99%

Price Competition Under Cost Uncertainty: A Laboratory Analysis

Abbink

Brandts

2003

SSRN Journal

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“…Recent examples of experiments adopting a Cournot framework are Rassenti et al (2000), Cox and Walker (1998), and Deck and Wilson (2003). Other experiments have focused more on pricing behavior, such as those examining the implications of the BertrandEdgeworth model (e.g., Kruse et al, 1982) and the use of a posted-offer pricing mechanism (e.g., Ketcham et al, 1984). 7 The key factor behind the Varian result is the proposed mixed strategy equilibrium in prices, an equilibrium that requires that all prices within the set of admissible prices generate the same expected profits, such that the change in profits arising from a price change is zero.…”

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confidence: 99%

Consumer and Competitor Reactions: Evidence from a Field Experiment

Barron¹,

Umbeck²,

Waddell

2007

SSRN Journal

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In response to a price change by a single seller, it is common for the density of sellers in the market to influence both the quantity response of consumers and the price response of other sellers. Using field experiment data collected around a series of exogenously imposed price changes we find that an individual retailer with a larger number of competitors faces a more-responsive demand. This finding is fundamental to a predicted inverse relationship between market prices and the number of competitors. We also examine the reaction of rival stations to exogenous price changes, and find that the magnitude of a competitor's response is inversely related to the density of stations in the market. © 2007 Elsevier B.V. All rights reserved. In changing a price, a seller must confront two key questions: What will be the reaction of consumers to a price change and what will be the reaction of competitors? A common feature of many models that consider price-setting is that answers to both questions depend on the number of competitors in the market. This paper draws on a field experiment that was conducted in three urban areas of California to see whether the number of competitors does indeed determine the extent of the reaction by a seller's potential customers as well as the extent of the reaction by competitors. The experiment set for short time intervals retail prices at 54 company-operated gasoline stations of a major retailer. In particular, prices at two alternating subsets of stations were changed and then fixed at these new levels for one-week periods over a three-month period. The result was to create exogenous deviations in the prices at "treatment" stations from what they otherwise would have been. During this period, information on the daily volumes of gasoline sold at the treatment stations was collected, as well as the daily prices at competitor stations within two miles of each of the 54 treatment stations.1 Barron et al. (2004) considered the effect of the number of sellers ("seller density") on aggregate price levels and on price dispersion across markets using single-day

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“…If it turned out that there was a tie for the lowest price between two or all three sellers for a service that buyers of 8 Buyer behavior is often simulated in posted-offer type experiments in order to focus on seller decisions. Examples include Alger (1987), Davis and Holt (1996), Davis and Williams (1991) and Kruse et al (1994). Stiglitz and Weiss (1983) note that, as opposed to signaling models, in screening models ''only firms are active players.... [and] in the insurance market studied by Rothschild-Stiglitz (1976), it is plausible to think of individuals as passively choosing from a set of insurance policies.'…”

Section: The Experimental Designmentioning

confidence: 99%

Screening equilibria in experimental markets

Posey

Yavaş

2007

Geneva Risk Insur Rev

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We conduct an experimental test of a screening model of an insurance market with asymmetric information. We first conduct three sessions in which the proportion of high risk buyers is such that a separating equilibrium should exist. We then conduct three more sessions in which the only change we make is decreasing the proportion of high risks such that the equilibrium is now a pooling equilibrium. In both treatments, the observed behavior converges to the equilibrium prediction.

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Bertrand-Edgeworth Competition in Experimental Markets

Cited by 93 publications

References 0 publications

Price Competition Under Cost Uncertainty: A Laboratory Analysis

Price Competition Under Cost Uncertainty: A Laboratory Analysis

Consumer and Competitor Reactions: Evidence from a Field Experiment

Screening equilibria in experimental markets

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