Coordination Failure in Capacity-Then-Price-Setting Games

Gueth, W., Stadler, M, Zaby, A., 2019. Coordination Failure in Capacity-then-Price-Setting Games. University of Tübingen Working Papers in Economics and Finance 116

30 Pages Posted: 27 Jan 2019

See all articles by Werner Güth

Werner Güth

Max Planck Institute for Research on Collective Goods; Luiss Guido Carli University

Manfred Stadler

University of Tuebingen

Alexandra K. Zaby

Seeburg Castle University

Date Written: January 11, 2019

Abstract

In capacity-then-price-setting games, soft capacity constraints are planned sales amounts where producing above capacity is possible but more costly. While the subgame perfect equilibrium predicts equal prices, experimental evidence often reveals price discrepancies. This failure to coordinate on equal prices can imply losses, especially when serving demand is obligatory. We compare coordination failure with efficient rationing as well as with compulsory serving of demand, and additionally allow for simultaneous and sequential capacity choices. These treatments lead to a varying severity of the threat of losses. Our experimental results show that (possible) coordination failure affects behavior through two channels: via anticipating as well as via reacting to a loss. While capacities increase in anticipation of losses, prices increase when anticipating losses but decrease after experiencing losses. Coordination failures are more probable after subjects experienced a loss.

Keywords: capacity-then-price competition, loss avoidance, path dependence, sequentiality of decisions, intra-play communication

JEL Classification: C72, C91

Suggested Citation

Güth, Werner and Stadler, Manfred and Zaby, Alexandra Karin, Coordination Failure in Capacity-Then-Price-Setting Games (January 11, 2019). Gueth, W., Stadler, M, Zaby, A., 2019. Coordination Failure in Capacity-then-Price-Setting Games. University of Tübingen Working Papers in Economics and Finance 116, Available at SSRN: https://ssrn.com/abstract=3314367 or http://dx.doi.org/10.2139/ssrn.3314367

Werner Güth

Max Planck Institute for Research on Collective Goods

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Manfred Stadler

University of Tuebingen ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Alexandra Karin Zaby (Contact Author)

Seeburg Castle University ( email )

Seeburgstr. 8
Seekirchen am Wallersee, 5201
Austria

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