Does nominal illusion generate collusive equilibria?
Enrique Fatas and
Antonio Morales ()
No 16-06, Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) from School of Economics, University of East Anglia, Norwich, UK.
We investigate nominal illusion in experimental duopoly markets in which firms choose first a market and then compete in prices. Markets are equivalent in real terms and only differ in the currency the price competition is run under. Our experimental results show a positive, persistent and monotone effect of the nominal exchange rate on prices. We introduce a simple equilibrium model based on invariant grids and nominal illusion. The model is consistent with the comparative statics observed in the experiment, it predicts well nominal and real price distributions across markets, and is consistent with more than 90% of the symmetric price profiles.
Keywords: invariant grids; prominent numbers; price competition; money illusion; experiments; nominal representation (search for similar items in EconPapers)
JEL-codes: C72 C9 D43 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
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