Price Competition Under Cost Uncertainty: A Laboratory Analysis

UFAE and IAE Working Paper No. 550.02

19 Pages Posted: 22 Aug 2003

See all articles by Klaus Abbink

Klaus Abbink

University of Nottingham - School of Economics

Jordi Brandts

Instituto de Analisis Economico (CSIC) Barcelona

Multiple version iconThere are 2 versions of this paper

Date Written: November 2002

Abstract

We study the relation between the number of firms and price-cost margins under price competition with uncertainty about competitors' costs. We present results of an experiment in which two, three and four identical firms repeatedly interact in this environment. In line with the theoretical prediction, market prices decrease with the number of firms, but on average stay above marginal costs. Pricing is less aggressive in duopolies than in triopolies and tetrapolies. However, independently from the number of firms, pricing is more aggressive than in the theoretical equilibrium. Both the absolute and the relative surpluses increase with the number of firms. Total surplus is close to the equilibrium level, since enhanced consumer surplus through lower prices is counteracted by occasional displacements of the most efficient firm in production.

Keywords: Laboratory experiments, industrial organisation, oligopoly, price competition

JEL Classification: C90, C72, D43, D83, L13

Suggested Citation

Abbink, Klaus and Brandts, Jordi, Price Competition Under Cost Uncertainty: A Laboratory Analysis (November 2002). UFAE and IAE Working Paper No. 550.02, Available at SSRN: https://ssrn.com/abstract=367482 or http://dx.doi.org/10.2139/ssrn.367482

Klaus Abbink

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
44-115-95-14768 (Phone)
44-115-95-14159 (Fax)

Jordi Brandts (Contact Author)

Instituto de Analisis Economico (CSIC) Barcelona ( email )

UAB Campus
E-08193 Bellaterra
Spain

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