Research Papers in Economics, Department of Economics, Stockholm University
Price Floors and Competition
(), Uri Gneezy
(), Jacob K. Goeree and Rosemarie Nagel
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.
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; (follow links to similar papers)
JEL-Codes: C92; D43; L13; (follow links to similar papers)
31 pages, June 19, 2002
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