24. Pricing in Bertrand Competition with Increasing Marginal Costs

Klaus Abbink and Jordi Brandts

No 62, Working Papers from Barcelona School of Economics

Abstract: Bertrand competition under decreasing returns involves a wide interval of pure strategy Nash equilibrium prices. We first present results of experiments in which two, three and four identical firms repeatedly interact in this environment. More firms lead to lower average prices. However, prices remain substantially above the Walrasian level. With more than two firms the predominant market price is 24, a price not predicted by conventional equilibrium theories. This phenomenon can be captured by a simple imitation model and by a focal point explanation. For the long run, the model predicts that prices converge to the Walrasian outcome. We then use data from three new treatments to properly test the influence of imitation and focality. We find that both forces are present, but that imitation dominates in large markets with a long interaction.

Keywords: Laboratory experiments; industrial organisation; oligopoly; price competition; co-ordination games; learning (search for similar items in EconPapers)
JEL-codes: C72 C90 D43 D83 L13 (search for similar items in EconPapers)
Date: 2003-01
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Journal Article: 24. Pricing in Bertrand competition with increasing marginal costs (2008)
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