A Laboratory Study of Duopoly Price Competition with Patient Buyers

19 Pages Posted: 27 Feb 2013

See all articles by Timothy N. Cason

Timothy N. Cason

Purdue University - Krannert School of Management

Shakun D. Mago

affiliation not provided to SSRN

Date Written: April 2013

Abstract

This article reports a duopoly experiment in which sellers compete to sell to a potentially patient buyer. Each period sellers simultaneously post prices and the buyer costlessly observes either one or both prices. The buyer can then either accept an observed price or reject all offers. Following a rejection, sellers may have an opportunity to post prices again in another round. We study how the duopolists' pricing behavior responds to changes in the likelihood of the buyer observing multiple prices, γ, and the probability of continuing to another round, δ. The unique stationary equilibrium features mixed strategies. Consistent with the equilibrium, observed prices are decreasing in γ and δ. Contrary to the equilibrium, however, buyers sometimes reject profitable price offers, and average prices are lower than predicted when only one round of offers is possible and higher than predicted in the multiple‐round game.

JEL Classification: D43, D83, L13

Suggested Citation

Cason, Timothy N. and Mago, Shakun D., A Laboratory Study of Duopoly Price Competition with Patient Buyers (April 2013). Economic Inquiry, Vol. 51, Issue 2, pp. 1123-1141, 2013. Available at SSRN: https://ssrn.com/abstract=2225678 or http://dx.doi.org/10.1111/j.1465-7295.2011.00429.x

Timothy N. Cason (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
765-494-1737 (Phone)

Shakun D. Mago

affiliation not provided to SSRN

No Address Available

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