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Price Competition and Market Concentration: An experimental Study

Author

Listed:
  • Dufwenberg, Martin

    (Dept. of Economics, Stockholm University)

  • Gneezy, Uri

    (Department of Economics, University of Haifa, Israel)

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.

Suggested Citation

  • Dufwenberg, Martin & Gneezy, Uri, 1999. "Price Competition and Market Concentration: An experimental Study," Research Papers in Economics 1999:4, Stockholm University, Department of Economics.
    • Handle: RePEc:hhs:sunrpe:1999_0004
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Bertrand Model; Price Competition; Boundered Rationality; noise-bidding;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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