UFAE and IAE Working Paper No. 523.02
27 Pages Posted: 5 Mar 2003
Date Written: July 2002
We study the relation between the number of firms and market power in experimental oligopolies. Price competition under decreasing returns involves a wide interval of pure strategy equilibrium prices. We present results of an experiment in which two, three and four identical firms repeatedly interact in this environment. Less collusion with more firms leads to lower average prices. With more than two firms, the predominant market price is 24. A simple imitation model captures this phenomenon. For the long run, the model predicts that prices converge to the Walrasian outcome, but for the intermediate term the modal price is 24.
Keywords: Laboratory experiments, industrial organisation, oligopoly, price competition, co-ordination games, learning
JEL Classification: C90, C72, D43, D83, L13
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