IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-07c70032.html
   My bibliography  Save this article

Price competition, level-k theory and communication

Author

Listed:
  • 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

    Download full text from publisher

    File URL: http://www.accessecon.com/pubs/EB/2008/Volume3/EB-07C70032A.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stahl, Dale II & Wilson, Paul W., 1994. "Experimental evidence on players' models of other players," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 309-327, December.
    2. Stahl Dale O. & Wilson Paul W., 1995. "On Players' Models of Other Players: Theory and Experimental Evidence," Games and Economic Behavior, Elsevier, vol. 10(1), pages 218-254, July.
    3. Tore Ellingsen & Magnus Johannesson, 2004. "Promises, Threats and Fairness," Economic Journal, Royal Economic Society, vol. 114(495), pages 397-420, April.
    4. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, vol. 93(1), pages 133-149, March.
    5. Stahl, Dale O. & Haruvy, Ernan, 2008. "Level-n bounded rationality and dominated strategies in normal-form games," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 226-232, May.
    6. Cason, Timothy N., 1995. "Cheap talk price signaling in laboratory markets," Information Economics and Policy, Elsevier, vol. 7(2), pages 183-204, June.
    7. Ellingsen, Tore & Östling, Robert, 2006. "Organizational Structure as the Channeling of Boundedly Rational Pre-play Communication," SSE/EFI Working Paper Series in Economics and Finance 634, Stockholm School of Economics.
    8. Vincent P. Crawford & Nagore Iriberri, 2007. "Fatal Attraction: Salience, Naïveté, and Sophistication in Experimental "Hide-and-Seek" Games," American Economic Review, American Economic Association, vol. 97(5), pages 1731-1750, December.
    9. Ernan Haruvy & Dale O. Stahl & Paul W. Wilson, 2001. "Modeling And Testing For Heterogeneity In Observed Strategic Behavior," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 146-157, February.
    10. Uri Gneezy, 2005. "Step-Level Reasoning and Bidding in Auctions," Management Science, INFORMS, vol. 51(11), pages 1633-1642, November.
    11. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-1326, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ebl:ecbull:v:3:y:2008:i:66:p:1-15 is not listed on IDEAS
    2. Wengström, Erik, 2007. "Setting the Anchor: Price Competition, Level-n Theory and Communication," Working Papers 2007:6, Lund University, Department of Economics.
    3. Wright, James R. & Leyton-Brown, Kevin, 2017. "Predicting human behavior in unrepeated, simultaneous-move games," Games and Economic Behavior, Elsevier, vol. 106(C), pages 16-37.
    4. Dufwenberg, Martin & Sundaram, Ramya & Butler, David J., 2010. "Epiphany in the Game of 21," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 132-143, August.
    5. Dengler, Sebastian & Prüfer, Jens, 2021. "Consumers' privacy choices in the era of big data," Games and Economic Behavior, Elsevier, vol. 130(C), pages 499-520.
    6. Binswanger, J. & Prüfer, J., 2012. "Democracy, populism, and (un)bounded rationality," Other publications TiSEM 6ebfff9d-e076-4d09-90c6-2, Tilburg University, School of Economics and Management.
    7. Berger, Ulrich & De Silva, Hannelore & Fellner-Röhling, Gerlinde, 2016. "Cognitive hierarchies in the minimizer game," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 337-348.
    8. Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2010. "Strategic Thinking," Levine's Working Paper Archive 661465000000001148, David K. Levine.
    9. Arad Ayala, 2012. "The Tennis Coach Problem: A Game-Theoretic and Experimental Study," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-43, April.
    10. Giovanna Devetag & Sibilla Guida & Luca Polonio, 2016. "An eye-tracking study of feature-based choice in one-shot games," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 177-201, March.
    11. Arad, Ayala, 2008. "The Tennis Coach Problem: A Game-Theoretic and Experimental Study," Foerder Institute for Economic Research Working Papers 275711, Tel-Aviv University > Foerder Institute for Economic Research.
    12. Zhang, Jun, 2021. "Level-k reasoning in school choice," Games and Economic Behavior, Elsevier, vol. 128(C), pages 1-17.
    13. Binswanger, Johannes & Prüfer, Jens, 2012. "Democracy, populism, and (un)bounded rationality," European Journal of Political Economy, Elsevier, vol. 28(3), pages 358-372.
    14. Ellingsen, Tore & Östling, Robert & Wengström, Erik, 2018. "How does communication affect beliefs in one-shot games with complete information?," Games and Economic Behavior, Elsevier, vol. 107(C), pages 153-181.
    15. Xiaolin Li & Özalp Özer & Upender Subramanian, 2022. "Are We Strategically Naïve or Guided by Trust and Trustworthiness in Cheap-Talk Communication?," Management Science, INFORMS, vol. 68(1), pages 376-398, January.
    16. Lai, Ernest K. & Lim, Wooyoung, 2012. "Authority and communication in the laboratory," Games and Economic Behavior, Elsevier, vol. 74(2), pages 541-560.
    17. Li, Xiaolin & Özer, Özalp & Subramanian, Upender, 2022. "Are we strategically naïve or guided by trust and trustworthiness in cheap-talk communication?," LSE Research Online Documents on Economics 107103, London School of Economics and Political Science, LSE Library.
    18. Feng, Jun & Qin, Xiangdong & Wang, Xiaoyuan, 2021. "A Bayesian cognitive hierarchy model with fixed reasoning levels," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 704-723.
    19. Dvijotham, Krishnamurthy & Rabani, Yuval & Schulman, Leonard J., 2022. "Convergence of incentive-driven dynamics in Fisher markets," Games and Economic Behavior, Elsevier, vol. 134(C), pages 361-375.
    20. Vincent P. Crawford & Nagore Iriberri, 2004. "Fatal Attraction: Focality, Naivete, and Sophistication in Experimental Hide-and-Seek Games," Levine's Bibliography 122247000000000316, UCLA Department of Economics.
    21. Strzalecki, Tomasz, 2014. "Depth of reasoning and higher order beliefs," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 108-122.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-07c70032. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.