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Setting the Anchor: Price Competition, Level-n Theory and Communication

Erik Wengström ()

No 2007:6, Working Papers from Lund University, Department of Economics

Abstract: This paper analyzes communication from the viewpoint of the level-n theory of bounded rationality. It examines if communication can be understood by the effect it has on high-level types’ beliefs about the actions of simpleminded level-0 players. We present experimental evidence from a slightly perturbed price competition game designed to test this interpretation. The main finding is that communication affects subjects in a way that seems compatible with the level-n 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-n 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: C72 C92 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-gth
Date: 2007-03-20
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Published in Economics Bulletin, 2008, pages 1-15.

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:lunewp:2007_006

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