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Price competition and market concentration: An experimental study

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áM ~i~~ Discussion ,,,, ~~Rex~n paper "`~ II II III IIIII I I I~ I I I N ~ I~ I V III IIMI~ II IIIII ~ I Center for Economic Research No. 9827 PRICE COMPETITION AND MARKET CONCENTRATION: AN EXPERIMENTAL STUDY By Martin Dufwenberg and Uri Gneery March 1998 ISSN 0924-7815 Price Competition and Market Concentration: An Experimental Study~ Martin Dufwenberg" and Uri Gneery"~ March 5, 1998 Abstract: The classical price competition model (named after Bertrand), prescribes that in equilibrium prices are equal to marginal costs. Moreover, prices do not depend on the number of competitors. Since this outcome is not in line with real-life observations, it is known as the "Bertrand Pazadox". Many theoretical problems with the original model have been considered as an explanation of the pazadox in the literature. In this paper we experimentally investigate a model which is immune to the theoretical critique of the original model. We Snd, nevertheless, that the outcome dces depend on the number ofcompetitors: the Bertrand solution does not predict well when the number ofcompetitors is two, but after some opportuttities for learrting are provided it tends to predict well when the number of competitors is three or four. A bounded rationality explanation of this is suggested. Keywords: Market Concentration, Imperfect Competition, Experiments. JEL: L13, C90, C70 ~ We wish to thank Eric van Damme and Georg Kirchsteiger for many helpfiil comments andsuggestions. This paper was conceived while both authors werc at the CentER for Economic Research atTilburg Universiry. We ti~ank CentER for its hospitality and financial support. '~ Department of Ernnomics, Uppsala University, Swcden. E-mail: martin.dufwenberg~nek.uu.se ~~' Department of Economics, University of Haifa, Israel. E-mail: gneery([~econ.haifa.ac.il(corresponding author) 1 Price Competition and Market Concentration: An Experimental Study L Introduction The investigation of oligopolistic mazkets is central in econ

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