Price competition and nominal illusion: experimental evidence and a behavioural model

Antonio Morales () and Enrique Fatas ()

SERIEs: Journal of the Spanish Economic Association, 2021, vol. 12, issue 4, No 4, 607-632

Abstract: Abstract The standard approach to nominal illusion in Economics sees it as a transitory phenomenon, as economic agents eventually see through the nominal veil, making the right choices. Recent empirical studies suggest that money illusion may persist, distorting real prices in a variety of economic environments, including the housing market and the stock market. In this paper, we explore the emergence and persistence of nominal illusion in an experimental entry game where firms must choose which local market to enter, and 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 market prices, statistically significant for large enough exchange rate. 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)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s13209-021-00235-7 Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:series:v:12:y:2021:i:4:d:10.1007_s13209-021-00235-7

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/13209

DOI: 10.1007/s13209-021-00235-7

Access Statistics for this article

SERIEs: Journal of the Spanish Economic Association is currently edited by Nezih Guner

More articles in SERIEs: Journal of the Spanish Economic Association from Springer, Spanish Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().