Price competition and market concentration: An experimental study

Martin Dufwenberg, Uri Gneezy

Research output: Contribution to journalArticle

148 Citations (Scopus)

Abstract

The classical price competition model (named after Bertrand), prescribes that in equilibrium prices are equal to marginal costs. Moreover, prices do not depend on the number of competitors. Since this outcome is not in line with real-life observations, it is known as the 'Bertrand Paradox.' In experimental price competition markets we find that prices do depend on the number of competitors: the Bertrand solution does not predict well when the number of competitors is two, but (after some opportunities for learning) predicts well when the number of competitors is three or four. A bounded rationality explanation of this is suggested.

Original languageEnglish (US)
Pages (from-to)7-22
Number of pages16
JournalInternational Journal of Industrial Organization
Volume18
Issue number1
StatePublished - Jan 2000
Externally publishedYes

Fingerprint

Costs
Competitors
Experimental study
Market concentration
Price competition
Equilibrium price
Marginal cost
Bounded rationality
Paradox

Keywords

  • Bertrand model
  • Bounded rationality
  • C92
  • Experiment
  • L13
  • Market concentration
  • Noise-bidding
  • Price competition

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Price competition and market concentration : An experimental study. / Dufwenberg, Martin; Gneezy, Uri.

In: International Journal of Industrial Organization, Vol. 18, No. 1, 01.2000, p. 7-22.

Research output: Contribution to journalArticle

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