Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition

24 Pages Posted: 13 May 2003

See all articles by C. Monica Capra

C. Monica Capra

Claremont Graduate University

Jacob K. Goeree

University of Virginia - Department of Economics

Rosario Gomez

University of Malaga

Charles A. Holt

University of Virginia - Department of Economics

Abstract

We consider a duopoly pricing game with a unique Bertrand-Nash equilibrium. The high-price firm has a nonvanishing market share, however, and intuition suggests that observed prices may be positively related to this market share. This relationship is implied by a model in which players make noisy (logit) best responses to expected payoff differences. The resulting logit equilibrium model was used to design an experiment in which the high-price firm's market share varies. The model accurately predicts the final-period price averages. A naive learning model predicts the observed differences in the time paths of average prices.

Suggested Citation

Capra, C. Monica and Goeree, Jacob and Gomez, Rosario and Holt, Charles A., Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition. International Economic Review, Vol. 43, pp. 613-636, 2002. Available at SSRN: https://ssrn.com/abstract=324687

C. Monica Capra (Contact Author)

Claremont Graduate University ( email )

170 E. Tenth Street
Claremont, CA 91711
United States

Jacob Goeree

University of Virginia - Department of Economics ( email )

P.O. Box 400182
114 Rouss Hall
Charlottesville, VA 22904-4182
United States
804-924-7649 (Phone)

Rosario Gomez

University of Malaga

Malaga, Málaga 29004
Spain

Charles A. Holt

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Rouss Hall #114
Charlottesville, VA 22904-4182
United States
(804) 924-7894 (Phone)

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