Price floors and competition

Martin Dufwenberg, Uri Gneezy, Jacob K. Goeree, Rosemarie Nagel

Research output: Contribution to journalArticle

28 Scopus citations

Abstract

A potential source of instability of many economic models is that agents have little incentive to stick with the equilibrium. We show experimentally that this can matter with price competition. The control variable is a price floor, which increases the cost of deviating from equilibrium. According to traditional theory, a higher floor allows competitors to obtain higher profits. Behaviorally, the opposite result obtains with two (but not with four) competitors. An error model, which builds on Luce (Individual Choice Behavior, 1959), can adequately describe supra-Nash pricing with a low-floor, but then fails to capture the overall pro-competitive effect of a high-floor seen for duopolies.

Original languageEnglish (US)
Pages (from-to)211-224
Number of pages14
JournalEconomic Theory
Volume33
Issue number1
DOIs
StatePublished - Oct 1 2007

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Keywords

  • Bertrand model
  • Experiment
  • Luce model
  • Price competition
  • Price floors

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Dufwenberg, M., Gneezy, U., Goeree, J. K., & Nagel, R. (2007). Price floors and competition. Economic Theory, 33(1), 211-224. https://doi.org/10.1007/s00199-006-0152-0