The Discrete Charm of Nominal Illusion

Enrique Fatas () and Antonio Morales ()

No 16630, Documentos de Trabajo from Universidad del Rosario

Abstract: We investigate the emergence and persistence of nominal illusion in an experimental entry game where firms must choose which local market to enter, then compete in prices. All local markets are equivalent in real terms and they only differ in the currency the price competition is run under. Our experimental results show a positive, persistent and monotone effect of the nominal exchange rate on (real) posted prices. We provide an explanation in terms of players simplifying the choice set using discrete grids.

Keywords: Price competition; money illusion; experiments; nominal representation (search for similar items in EconPapers)
JEL-codes: C72 C9 D43 L13 (search for similar items in EconPapers)
Pages: 31
Date: 2018-09-14
New Economics Papers: this item is included in nep-exp and nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:col:000092:016630

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