Bertrand-Edgeworth Competition in Experimental Markets

The Bertrand-Edgeworth (BE) model describes competition among a group of price setting sellers, each of whom faces a production capacity constraint. We report on laboratory experiments that were designed so as to capture essential features of BE competition. These experiments permit us to evaluate d...

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Bibliographic Details
Published in:Econometrica 1994-03, Vol.62 (2), p.343-371
Main Authors: Kruse, Jamie Brown, Rassenti, Stephen, Reynolds, Stanley S., Smith, Vernon L.
Format: Article
Language:English
Subjects:
Applied sciences
Coefficients
Collusion
Competition
Design
Duopolies
Duopoly
Economic competition
Economic models
Economic theory
Equilibrium
Exact sciences and technology
Experiment design
Experimental economics
Experiments
Game theory
Laboratories
Market
Market prices
Miscellaneous
Mixed strategy
Monopoly
Nash equilibrium
Operational research and scientific management
Operational research. Management science
Price formation
Price level changes
Price theory
Prices
Pricing policies
Production capacity
Schedules
Studies
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Summary:The Bertrand-Edgeworth (BE) model describes competition among a group of price setting sellers, each of whom faces a production capacity constraint. We report on laboratory experiments that were designed so as to capture essential features of BE competition. These experiments permit us to evaluate different theories of BE competition: Competitive equilibrium (CE) pricing, Edgeworth cycles in prices, mixed strategy Nash equilibrium (NE) in prices, and tacit collusion. The experimental results indicate that while each of the theories helps to explain some aspects of the data, none of these theories are completely consistent with the data. In relative terms, the Edgeworth cycle theory provides better predictions than the other three theories. Most sellers adjusted their prices partially to their predicted Edgeworth price. The Edgeworth cycle theory is the only theory that predicts the kind of time dependence and cycling that was observed in most experiments.
ISSN:0012-9682
1468-0262
DOI:10.2307/2951616