Sequential Price Setting: Theory and Evidence from a Lab Experiment
Principal Investigator(s): View help for Principal Investigator(s) Tom-Reiel Heggedal, BI Norwegian Business School
Version: View help for Version V1
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Project Citation:
Heggedal, Tom-Reiel. Sequential Price Setting: Theory and Evidence from a Lab Experiment. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2023-11-01. https://doi.org/10.3886/E194854V1
Project Description
Summary:
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In the Varian (1980) model of price competition, a change from simultaneous to sequential price setting dramatically changes equilibrium strategies and pay-offs, and in the unique symmetric equilibrium prices are pushed up to the monopoly price. In addition there exists an asymmetric equilibrium with lower average prices. Our main contribution is to test these predictions in the laboratory. Our experimental data strongly support the qualitative model predictions. However, there is a non-negligible fraction of players that set low prices in accordance with the asymmetric equilibrium, which is puzzling. We show that the puzzle to a large extent can be resolved by introducing competitive preferences in the model.
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