Price competition, level-k theory and communication

Erik Wengström

Economics Bulletin, 2008, vol. 3, issue 66, 1-15

Abstract: This paper analyzes communication in a price competition game using the level-$k$ theory of bounded rationality. The level-k analysis predicts prices to be higher with communication than without. Our experimental evidence lends support to the view that communication affects subjects in a way that is compatible with the level-k model, indicating that people lie in order to fool other players that they believe do less thinking. Moreover, the results indicate that the predictive power of the level-k model does crucially depend on the possibility for high level players to form homogenous beliefs about the behavior of the level-0 players.

Keywords: Noncooperative; Game; Theory; Communication; Bounded; Rationality; Experiments (search for similar items in EconPapers)
JEL-codes: C7 C9 (search for similar items in EconPapers)
Date: 2008-10-17
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