Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition

C. Monica Capra, Jacob Goeree, Rosario Gomez and Charles Holt

Virginia Economics Online Papers from University of Virginia, Department of Economics

Abstract: This paper considers a duopoly price-choice game in which the unique Nash equilibrium is the Bertrand outcome. Price competition, however, is imperfect in the sense that the market share of the high-price firm is not zero. Economic intuition suggests that price levels should be positively related to the market share of the high-price firm. Although this relationship is not predicted by standard game theory, it is implied by a generalization of the Nash equilibrium that results when players make noisy (logit) best responses to expected payoff differences. This logit equilibrium model was used to design a laboratory experiment with treatments that correspond to changing the market share of the high-price firm. The model predicts the final-period price averages for both treatments with remarkable accuracy. Moreover computer simulations of a naive learning model were used, ex ante, to predict the observed differences in the time paths of average prices.

Keywords: laboratory experiments; simulation; decision error; learning; logit equilibrium. (search for similar items in EconPapers)
JEL-codes: C72 C92 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2000-01
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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http://repec.as.virginia.edu/RePEc/vir/virpap/papers/virpap336.pdf (application/pdf)

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Journal Article: Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:vir:virpap:336

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