Price Competition Under Cost Uncertainty: A Laboratory Analysis

Abstract

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.

Experimentally observed imitation and cooperation in price competition on the circle

“…More recent studies include Dufwenberg and Gneezy (2000), and Brandts (2002a, 2002b). Dufwenberg and Gneezy (2000) analyzes the classical Bertrand price competition model, Abbink and Brandts (2002a) study a model of price competition under decreasing returns, and Abbink and Brandts (2002b) focus on price competition under cost uncertainty. Again, these papers conclude that more firms in the market place lead to a higher degree of competition.…”

Industry structure and collusion with uniform yardstick competition: Theory and experiments

“…Ivaldi et al, 2003). Experimental studies, such as Abbink and Brandts (2005) or Fonseca and Normann (2008), confirm these insights.…”

“…Other studies look at homogeneous-product price-setting oligopolies. Abbink and Brandts (2005) find that collusion decreases with the number of firms when costs are private information. Abbink and Brandts (2008) find the same result with increasing marginal costs, and Fonseca and Normann (2008) with capacity constraints.…”

“…Abbink and Brandts (2005) find that collusion decreases with the number of firms when costs are private information. Abbink and Brandts (2008) find the same result with increasing marginal costs, and Fonseca and Normann (2008) with capacity constraints. Fonseca and Normann (2012) also find more collusion with fewer firms.…”

Oligopoly Experiments in the Current Millennium

“…Basically, implicit coordination on a joint‐profit maximizing price is frequently observed in markets with two sellers, rarely in markets with three sellers, and almost never in markets with four or more sellers . This effect has been observed in posted‐offer markets (Brandts and Guillen, ; Davis, ; Ewing and Kruse, ; Fonseca and Normann, ), under Bertrand competition (Abbink and Brandts, , ; Orzen, ), as well as Cournot competition (Huck et al ., )…”