An Experimental Study of Commitment in Stackelberg Games with Observation Costs

46 Pages Posted: 2 Jan 2006

See all articles by John Morgan

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Felix Várdy

International Monetary Fund (IMF)

Abstract

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

Suggested Citation

Morgan, John and Várdy, Felix, An Experimental Study of Commitment in Stackelberg Games with Observation Costs. Games and Economic Behavior, Vol. 49, No. 2, pp. 401-423, November 2004. Available at SSRN: https://ssrn.com/abstract=873245

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

Felix Várdy (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
56
Abstract Views
685
rank
387,539
PlumX Metrics