The impact of experience on prices and profits in experimental duopoly markets

doi:10.1016/0167-2681(88)90015-7

Journal of Economic Behavior & Organization

Volume 9, Issue 4, June 1988, Pages 345-365

https://doi.org/10.1016/0167-2681(88)90015-7 Get rights and content

Abstract

Experimental posted price duopoly markets, wherein differentiated products were sold under conditions of incomplete information, were designed to explore the impact of experience on prices and profits. Two types of markets were run simultaneously. One type involved participants with previous experience in similar markets, while the other involved inexperienced subjects facing the same pricing decisions as their experienced counterparts. Probit analysis of the resulting data indicated significant relationships between experience and achieving equilibria predicted by tacit collusion. The results reinforce the growing realization that experience may be an important consideration in experimental tests of static market equilibria models.

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Cited by (18)

On the malleability of fairness ideals: Spillover effects in partial and impartial allocation tasks
2018, Journal of Economic Psychology
Citation Excerpt :
Harrison, McKee, and Rutstrom (1987) find in an experiment on market power that experienced subjects are much more effective in becoming monopolists than inexperienced ones. Benson and Faminow (1988) notice that when experiments are conducted with inexperienced subjects, collusion is rarely detected. The opposite holds when experienced subjects are recruited.
How malleable are people’s fairness ideals? Although fairness is an oft-invoked concept in allocation situations, it is still unclear whether and to what extent people’s allocations reflect their fairness ideals. We investigate in a laboratory experiment whether people’s fairness ideals are sensitive to spillover effects associated with the specific order of allocation tasks. Participants first generate resources in a real-effort task and then distribute them. In the partial allocation task, the participant determines the earnings for herself and another participant. In the impartial allocation task, the participant determines the earnings for two other participants. We also manipulate the participants’ experience, i.e., whether they took part in similar allocation experiments before. We find that participants are more likely to allocate more resources to themselves than what they earned in the real-effort task when they decide partially. Exclusively for inexperienced participants, deciding impartially first dampens selfish behavior when they decide partially.
Tie-breaking rules and divisibility in experimental duopoly markets
2008, Journal of Economic Behavior and Organization
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For instance, prior posted-offer experiments focused on factors such as the number of sellers (see Davis et al., 2002), the amount of information provided to sellers (Brown-Kruse et al., 1994), the role of subject experience (Alger, 1987; Benson and Faminow, 1988; Friedman and Hoggatt, 1980), mergers (Davis and Holt, 1994), and so on.7 Some of these studies involve duopoly markets as well (e.g., Davis et al., 2002; Friedman and Hoggatt, 1980; Alger, 1987; Benson and Faminow, 1988). To the best of our knowledge, there are few studies focusing on the effect of tie-breaking rules and divisibility.
We investigate pricing behavior of sellers in duopoly markets with posted prices and market power. The two treatment variables are given by tie-breaking rules and divisibility of the price space. The first treatment variable deals with the rule under which demanded units are allocated between sellers in case of a price tie. A change in divisibility is modeled by making the sellers’ price space finer or coarser. We find that the incidence of perfect collusion is significantly higher under the sharing tie-breaking rule than under the random (coin-toss) one, especially when the price space is less divisible.
Two are few and four are many: Number effects in experimental oligopolies
2004, Journal of Economic Behavior and Organization
Citation Excerpt :
What is the impact of experience on market outcomes in experiments? While there is no evidence on this reported for Cournot markets, Benson and Faminow (1988) show that, in posted-price markets with differentiated products, experience plays a significant role in achieving equilibria predicted by tacit collusion. Even though the sessions with experienced subjects were scheduled one month after the initial sessions, experience significantly increased prices.
In this paper we investigate how the competitiveness of Cournot markets varies with the number of firms in an industry. We review previous Cournot experiments in the literature. Additionally, we conduct a new series of experiments studying oligopolies with two, three, four, and five firms in a unified frame. With two firms we find some collusion. Three-firm oligopolies tend to produce outputs at the Nash level. Markets with four or five firms are never collusive and typically settle at or above the Cournot outcome. Some of those markets are actually quite competitive with outputs close to the Walrasian outcome.
Cooperation in symmetric duopolies with demand inertia
2000, International Journal of Industrial Organization
We present an experiment on a price-setting duopoly with demand inertia and symmetric costs. Subjects gain experience in the game by playing it twice. In the first play, we observe prices above the subgame perfect equilibrium solution. All markets show considerable price instability. In the second play, the price level is higher than in the first play. About half of the markets exhibit price instability, while the remaining markets are characterized by high stable prices. Comparing these results with those of a similar duopoly with asymmetric costs, we conclude that markets with symmetric costs show significantly more cooperative behavior.
Oligopoly experimentation of learning with simulated markets
1998, Journal of Economic Behavior and Organization
Learning is investigated using experimental methods. Agents have no information about demand conditions. The same oligopoly market is finitely repeated, and the only link between successive markets is that agents acquire experience over time as the game is played. Adaptive as well as least squares learning are tested. The model of price adjustment followed by firms indicates that the non-cooperative Bertrand–Nash equilibrium constitutes an attractor to players' strategies.
Market entry: An experimental investigation
1995, Journal of Socio-Economics
Experimental oligopoly markets for homogeneous products were conducted to investigate cooperative behaviors when subjects were allowed to choose whether or not to enter the market. Two types of games were designed. One was a one-stage game in which subjects were given a payoff table and asked only to make an entry decision; the other was a two-stage game in which subjects had to decide whether or not to enter and then compete either in prices or in quantities. Data indicated a significant tendency to establish entry cycles, with players entering one at a time, in the one-stage “price-setting” markets. On the contrary, this tendency was never observed in the one-stage “quantity-setting” markets. The results in the two-stage game reinforced the difference in the observed behaviors between the price- and quantity-setting markets. In the former, subjects generally behaved in conformity with the Nash equilibrium predictions, whereas in the latter these predictions were not observed.

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^☆: Senior authorship is not assigned. These market experiments were funded by the Department of Agricultural Economics and Economics at Montana State University and the Political Economy Research Center of Bozeman, Montana. We wish to thank Myles Watts and Terry Anderson for their support in obtaining funding and facilities, Ann Hudecek for assistance in data entry and analysis, Roger Lloyd, Paul Siebrasse, Russell Tronstad and Rick Judd for their assistance in supervising the experimental markets, and an anonymous referee for very helpful comments and criticisms.

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The impact of experience on prices and profits in experimental duopoly markets☆

Abstract

Journal of Economic Theory

Journal of Economic Behavior and Organization

Journal of Economic Theory

Equilibria in the laboratory: Experiments with oligopoly markets where goods are made to order

Investigating oligopolies within the laboratory

An alternative view of pricing in retail food markets

American Journal of Agricultural Economics

Spatial economics: Implications for food market response to retail price reporting

Journal of Consumer Affairs

On the implications of reporting retail food prices over extended periods

Journal of Consumer Affairs

Price reporting in experimental markets

Canadian Journal of Agricultural Economics