Excess Capacity and Pricing in Bertrand-Edgeworth Markets: Experimental Evidence

We conduct experiments testing the relationship between excess capacity and pricing in repeated Bertrand-Edgeworth duopolies and triopolies. We systematically vary the experimental markets between low excess capacity (suggesting monopoly) and no capacity constraints (suggesting perfect competition). Controlling for the number of firms, higher production capacity leads to lower prices. However, the decline in prices as industry capacity rises is less pronounced than predicted by Nash equilibrium, and a model of myopic price adjustments has greater predictive power. With higher capacities, Edgeworth-cycle behavior becomes less pronounced, causing lower prices. Evidence for tacit collusion is limited and restricted to low-capacity duopolies.

[1]  Vernon L. Smith,et al.  A Comparison of Posted-Offer and Double-Auction Pricing Institutions , 1984 .

[2]  W. Güth,et al.  Capacity Choices and Price Competition in Experimental Markets , 2001 .

[3]  J. Hinloopen,et al.  Laboratory evidence on the effectiveness of corporate leniency programs , 2008 .

[4]  Michael D. Noel.  *Edgeworth Price Cycles: Evidence from the Toronto Retail Gasoline Market , 2004 .

[5]  U. Fischbacher.  z-Tree: Zurich toolbox for ready-made economic experiments , 1999 .

[6]  Miguel A. Fonseca,et al.  Mergers, Asymmetries and Collusion: Experimental Evidence , 2008 .

[7]  E. Maskin,et al.  A Theory of Dynamic Oligopoly, II: Price Competition , 1985 .

[8]  Patrick Rey,et al.  Capacity constraints, mergers and collusion , 2002 .

[9]  Quantity precommitment in an experimental oligopoly market , 2000 .

[10]  Daniel A Meisel.  Blowing the whistle , 2000, The Lancet.

[11]  K. Kühn.  How Market Fragmentation Can Facilitate Collusion , 2012 .

[12]  Dan Kovenock,et al.  It takes two to tango: Equilibria in a model of sales , 1992 .

[13]  M. Dufwenberg,et al.  Price Competition and Market Concentration : An Experimental Study * , 1998 .

[14]  Ruchira S. Datta.  Using computer algebra to find nash equilibria , 2003, ISSAC '03.

[15]  Zhongmin Wang.  (Mixed) Strategy in Oligopoly Pricing: Evidence from Gasoline Price Cycles Before and Under a Timing Regulation , 2009, Journal of Political Economy.

[16]  Stephen J. Rassenti,et al.  Bertrand-Edgeworth competition in experimental markets , 2000 .

[17]  Kai A. Konrad,et al.  The Merger Paradox and Why Aspiration Levels Let it Fail in the Laboratory , 2006 .

[18]  Timothy N. Cason,et al.  The dynamics of price dispersion, or Edgeworth variations , 2005 .

[19]  David M. Kreps,et al.  A Course in Microeconomic Theory , 2020 .

[20]  David M. Kreps,et al.  Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes , 1983 .

[21]  F. Y. Edgeworth.  Papers Relating To Political Economy , 1925 .

[22]  H. Orzen.  Counterintuitive number effects in experimental oligopolies , 2008 .

[23]  Jeffrey M. Wooldridge,et al.  Cluster-Sample Methods in Applied Econometrics , 2003 .

[24]  Jamie Brown-Kruse.  Bertrand-Edgeworth Competition in Experimental Markets , 1994 .

[25]  Martin Dufwenberg,et al.  Price floors and competition , 2007 .

[26]  Jordi Brandts,et al.  Collusion and Fights in an Experiment with Price-Setting Firms and Advance Production , 2007 .

[27]  An Experimental Examination of Market Concentration and Capacity Effects on Price Competition , 2010 .

[28]  M. Noel,et al.  Edgeworth Price Cycles, Cost-Based Pricing, and Sticky Pricing in Retail Gasoline Markets , 2005, The Review of Economics and Statistics.

[29]  Philip H. Ramsey.  Nonparametric Statistical Methods , 1974, Technometrics.

[30]  V. Smith,et al.  Research in Experimental Economics , 1979 .

[31]  John Morgan,et al.  An experimental study of price dispersion , 2006, Games Econ. Behav..

[32]  Charles R. Plott,et al.  An Experimental Examination of Two Exchange Institutions , 1978 .

[33]  Emmanuel Dechenaux,et al.  Caps on bidding in all-pay auctions: Comments on the experiments of A. Rapoport and W. Amaldoss , 2006 .

[34]  Andrew Eckert,et al.  Retail Price Cycles and Response Asymmetry , 2002 .

[35]  Jörg Oechssler,et al.  Two are few and four are many: number effects in experimental oligopolies , 2004 .

[36]  Nick Feltovich,et al.  Experimental Evidence of a Sunk-Cost Paradox: A Study of Pricing Behavior in Bertrand-Edgeworth Duopoly , 2011 .

[37]  M. Shubik,et al.  Price duopoly and capacity constraints , 1972 .

[38]  J. Bertrand.  Cournot oligopoly: Review of Walras's Théorie mathématique de la richesse sociale and Cournot's Recherches sur les principes mathématiques de la théorie des richesses , 1989 .

[39]  D. Kovenock,et al.  A Comment on “David and Goliath: An Analysis on Asymmetric Mixed-Strategy Games and Experimental Evidence” , 2003 .

[40]  Edgeworth Cycles Revisited , 2008 .

[41]  W. Brock,et al.  Price Setting Supergames with Capacity Constraints , 1985 .

[42]  Klaus Gugler,et al.  How Effective is European Merger Control , 2011 .

[43]  Jordi Brandts,et al.  Collusion in growing and shrinking markets : empirical evidence from experimental duopolies , 2005 .

[44]  Michael D. Noel.  Edgeworth price cycles , 2011 .

[45]  Øystein Foros,et al.  Gasoline Prices Jump Up on Mondays: An Outcome of Aggressive Competition? , 2008 .