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Price Floors and Competition

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Author Info
Dufwenberg, Martin () (Dept. of Economics, Stockholm University)
Gneezy, Uri () (University of Chiacgo Graduate School og Business and Technion)
Goeree, Jacob K. (CREED, University of Amsterdam)
Nagel, Rosemarie () (Pompeu Fabra)

Additional information is available for the following registered author(s):

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 may matter with price competition. The control variable is a price floor, which increases the cost of deviating from equilibrium. Theoretically the floor allows competitors to obtain higher

profits, as low prices are excluded. However, behaviorally the opposite is observed; with a floor competitors receive lower joint profits. An error model (logit equilibrium) captures some but not all the important features of the data. We provide statistical support for a complementary explanation, which refers to how "threatening" an equilibrium is.

We discuss the economic import of these findings, concerning matters like resale price maintenance and auction design.

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Publisher Info
Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2002:13.

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Length: 31 pages
Date of creation: 19 Jun 2002
Date of revision:
Handle: RePEc:hhs:sunrpe:2002_0013

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Related research
Keywords: Price competition; price floors; Bertrand model; experiment; salience; logit equilibrium; threats;

Other versions of this item:

Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  3. Rosenthal, Robert W, 1989. "A Bounded-Rationality Approach to the Study of Noncooperative Games," International Journal of Game Theory, Springer, vol. 18(3), pages 273-91.
  4. Smith, Vernon L & Walker, James M, 1993. "Monetary Rewards and Decision Cost in Experimental Economics," Economic Inquiry, Oxford University Press, vol. 31(2), pages 245-61, April.
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  7. Dufwenberg, Martin & Gneezy, Uri, 2002. "Information disclosure in auctions: an experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 48(4), pages 431-444, August. [Downloadable!] (restricted)
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  11. C. Monica Capra et al., 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, vol. 89(3), pages 678-690, June. [Downloadable!] (restricted)
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  14. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December. [Downloadable!] (restricted)
  15. Yongmin Chen, 1999. "Oligopoly Price Discrimination and Resale Price Maintenance," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 441-455, Autumn. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. José Apesteguia & Martin Dufwenberg & Reinhard Selten, 2003. "Blowing the Whistle," Bonn Econ Discussion Papers bgse9_2003, University of Bonn, Germany. [Downloadable!]
    Other versions:
  2. Klaus Abbink & Jordi Brandts, 2002. "Price competition under cost uncertainty: A laboratory analysis," UFAE and IAE Working Papers 550.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
  3. Jason Abrevaya, 2008. "On recombinant estimation for experimental data," Experimental Economics, Springer, vol. 11(1), pages 25-52, March. [Downloadable!] (restricted)
  4. Klaus Abbink & Jordi Brandts, 2005. "Collusion in Growing and Shrinking Markets: Empirical Evidence from Experimental Duopolies," UFAE and IAE Working Papers 648.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
  5. Steffen Huck & Gabriele K. Ruchala & Jean-Robert Tyran, 2007. "Pricing and Trust," Discussion Papers 07-04, University of Copenhagen. Department of Economics. [Downloadable!]
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  6. David Cooper, 2007. "An introduction to the symposium on behavioral game theory," Economic Theory, Springer, vol. 33(1), pages 1-10, October. [Downloadable!] (restricted)
  7. Dirk Engelmann & Dorothea Kübler, 2007. "Do Legal Standards Affect Ethical Concerns of Consumers?," IZA Discussion Papers 3266, Institute for the Study of Labor (IZA). [Downloadable!]
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  8. Gallice, Andrea, 2008. "The Neglected Effects of Demand Characteristics on the Sustainability of Collusion," CEPR Discussion Papers 6975, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Klaus Abbink & Jordi Brandts, 2005. "Collusion in Growing and Shrinking Markets: Empirical Evidence from Experimental Duopolies," Discussion Papers 2005-03, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham. [Downloadable!]
  10. Philip A. Haile & Ali Hortacsu & Grigory Kosenok, 2003. "On the Empirical Content of Quantal Response Equilibrium," Cowles Foundation Discussion Papers 1432, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
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