 Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopolySteve Buchheit and Nick Feltovich No 2010-124, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE) Abstract: A well–known implication of microeconomic theory is that sunk costs should have no effect on decision making. We test this hypothesis with a human–subjects experiment. Students recruited from graduate business courses, with an average of over six years of work experience, played the role of firms in a repeated price–setting duopoly game in which both firms had identical capacity constraints and costs, including a sunk cost that varied across experimental sessions over six different values. We find, contrary to the prediction of microeconomic theory, that subjects’ pricing decisions show sizable differences across treatments. The effect of the sunk cost is non–monotonic: as it increases from low to medium levels, average prices decrease, but as it increases from medium to high levels, average prices increase. These effects are not apparent initially, but develop quickly and persist throughout the game. Cachon and Camerer’s (1996) loss avoidance is consistent with both effects, while cost–based pricing predicts only the latter effect, and is inconsistent with the former. Keywords: oligopoly; posted prices; capacity constraints; loss avoidance; cost–based pricing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:363 Access Statistics for this paper More papers in SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE) 31 Buccleuch Place, EH8 9JT, Edinburgh. Contact information at EDIRC. |
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