The Size of the Cost Asymmetry and Bertrand Competition: Experimental Evidence

Abstract

The static Nash equilibrium solution for a discretized Bertrand-duopoly market with asymmetric constant marginal costs recommends that the low-cost firm should charge a price equal to the high-cost firm’s marginal cost, and thus steal the entire market. This sharp prediction holds true for any size of the cost asymmetry. We develop three stylized asymmetric duopoly price competition models, steadily vary the size of the cost asymmetry across these models, and experimentally investigate the impact of this variation on competition. We find that the predictive power of the Bertrand solution crucially depends on the size of the cost asymmetry; the deviation of the observed average market price from the static Nash price systematically increases as the degree of the asymmetry narrows. Thus, behaviorally a smaller cost asymmetry may lead to higher prices in a Bertrand-duopoly – a key insight valuable from an antitrust standpoint.

Keywords: Asymmetric costs, price competition, experiment

JEL Classification: L11, L12, C91