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.
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We thank Jan Bouckaert, David Cooper, Simon Gächter, Reinhard Selten, Frank Verboven, a referee, and the participants at several seminars for stimulating discussions and helpful suggestions. The research has been sponsored by the Swedish Competition Authority. Martin Dufwenberg gratefully acknowledges the hospitality of the Laboratory of Experimental Economics at Bonn University, where he was visiting when part of the research was completed. Rosemarie Nagel acknowledges financial support of Spain’s Ministry of Education under Grants SEC2002-03403 and SEC2005-08931 and thanks the Barcelona Economics Program of CREA for support.
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Dufwenberg, M., Gneezy, U., Goeree, J.K. et al. Price floors and competition. Economic Theory 33, 211–224 (2007). https://doi.org/10.1007/s00199-006-0152-0
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DOI: https://doi.org/10.1007/s00199-006-0152-0