An Experimental Study of Commitment in Stackelberg Games with Observation Costs
46 Pages Posted: 2 Jan 2006
We report on experiments examining the value of commitment in Stackelberg games where the follower chooses whether to pay some cost to perfectly observe the leader's action. Várdy (2004) shows that in the unique pure strategy subgame perfect equilibrium of this game, the value of commitment is lost completely; however, there exists a mixed-strategy subgame perfect equilibrium where the value of commitment is fully reserved. In the data, the value of commitment is largely preserved when the cost of looking is small, while it is lost when the cost is large. Nevertheless, for small observation costs, equilibrium behavior is clearly rejected. Instead, subjects persistently play non-equilibrium strategies in which the probability of the follower choosing to observe the leader's action is a decreasing function of the observation cost.
Keywords: Stackelberg Duopoly, Experiments, Observation Costs, Commitment
JEL Classification: C72, C91, D82, D83, D84
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