Price Floors and Competition

Martin Dufwenberg, Uri Gneezy, Jacob Goeree and Rosemarie Nagel

No 2002:13, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: A potential source of instability of many economic models is that agents have little incentive to stick with the equilibrium. We show experimentally that this may matter with price competition. The control variable is a price floor, which increases the cost of deviating from equilibrium. Theoretically the floor allows competitors to obtain higher

profits, as low prices are excluded. However, behaviorally the opposite is observed; with a floor competitors receive lower joint profits. An error model (logit equilibrium) captures some but not all the important features of the data. We provide statistical support for a complementary explanation, which refers to how "threatening" an equilibrium is.

We discuss the economic import of these findings, concerning matters like resale price maintenance and auction design.

Keywords: Price competition; price floors; Bertrand model; experiment; salience; logit equilibrium; threats (search for similar items in EconPapers)
JEL-codes: C92 D43 L13 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2002-06-19
New Economics Papers: this item is included in nep-exp and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Price floors and competition (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2002_0013

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