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Price Competition and Market Concentration: An experimental Study

Martin Dufwenberg () and Uri Gneezy
Additional contact information
Martin Dufwenberg: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

No 1999:4, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: The classical price competition model (named after Bertrand), prescribes that in equilibrium prices are equal to marginal costs. Moreover, prices do not depend on the number of competitors. Since this outcome is not in line with real-life observations, it is known as the Bertrand Paradox". Many theoretical problems with the original model have been considered as an explanation of the paradox in the literature. In this paper we experimentally investigate a model which is immune to the theoretical critique of the original model. We find, nevertheless, that the outcome does depend on the number of competitors: the Bertrand solution does not predict well when the number of competitors is two, but after some opportunities for learning are provided it tends to predict well when the number of competitors is three or four. A bounded rationality explanation of this is suggested.

Keywords: Bertrand Model; Price Competition; Boundered Rationality; noise-bidding (search for similar items in EconPapers)
JEL-codes: C92 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-ind
Date: 1999-09-17
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Related works:
Journal Article: Price competition and market concentration: an experimental study (2000) Downloads
Working Paper: Price Competition and Market COncentration: An Experimental Study (1998)
Working Paper: Price Competition and Market Concentration: An Experimental Study (1998) Downloads
Working Paper: Price competition and market concentration: An experimental study (1998) Downloads
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