Research Papers in Economics, Department of Economics, Stockholm University
Price Competition and Market Concentration: An experimental Study
() and Uri Gneezy
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.
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; (follow links to similar papers)
JEL-Codes: C92; L13; (follow links to similar papers)
26 pages, September 17, 1999
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