Price competition under cost uncertainty: A laboratory analysis

Klaus Abbink and Jordi Brandts

No 58, Working Papers from Barcelona School of Economics

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.

Keywords: Laboratory experiments; industrial organization; oligopoly; price competition (search for similar items in EconPapers)
JEL-codes: C72 C90 D43 D83 L13 (search for similar items in EconPapers)
Date: 2015-09
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Related works:
Journal Article: Price Competition Under Cost Uncertainty: A Laboratory Analysis (2005)
Working Paper: Price competition under cost uncertainty: A laboratory analysis (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:58

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