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Price competition, level-k theory and communication

Author

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  • Erik Wengström

    (University of Copenhagen)

Abstract

This paper analyzes communication in a price competition game using the level-$k$ theory of bounded rationality. The level-k analysis predicts prices to be higher with communication than without. Our experimental evidence lends support to the view that communication affects subjects in a way that is compatible with the level-k model, indicating that people lie in order to fool other players that they believe do less thinking. Moreover, the results indicate that the predictive power of the level-k model does crucially depend on the possibility for high level players to form homogenous beliefs about the behavior of the level-0 players.

Suggested Citation

  • Erik Wengström, 2008. "Price competition, level-k theory and communication," Economics Bulletin, AccessEcon, vol. 3(66), pages 1-15.
    • Handle: RePEc:ebl:ecbull:eb-07c70032
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Noncooperative Game Theory Communication Bounded Rationality Experiments;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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