Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 1999:4: Price Competition and Market Concentration: An experimental Study

Martin Dufwenberg () and Uri Gneezy ()
Additional contact information
Martin Dufwenberg: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Uri Gneezy: 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.

Keywords: Bertrand Model; Price Competition; Boundered Rationality; noise-bidding

JEL-codes: C92; L13

26 pages, September 17, 1999

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