(), Uri Gneezy
(), Jacob K. Goeree
and Rosemarie Nagel
Martin Dufwenberg: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Uri Gneezy: University of Chiacgo Graduate School og Business and Technion, Postal: The University of Chicago Graduate School of Business , 1101 East 58th Street, Chicago, IL 60637 , USA
Jacob K. Goeree: CREED, University of Amsterdam, Postal: Faculty of Economics , and Econometrics, Roetersstraat 11, 1018 WB Amsterdam, NL
Rosemarie Nagel: Pompeu Fabra
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. We discuss the economic import of these findings, concerning matters like resale price maintenance and auction design.
31 pages, June 19, 2002
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