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Sequential Price Setting: Theory And Evidence From A Lab Experiment

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  • Tom‐Reiel Heggedal
  • Leif Helland
  • Espen R. Moen

Abstract

In the Varian (1980; American Economic Review 70(4) (1980), 651–59) model of price competition, a change from simultaneous to sequential price setting dramatically changes equilibrium strategies, and in the unique symmetric, equilibrium prices are pushed up to the monopoly price. There also exists an asymmetric equilibrium with lower average prices. Our main contribution is to test these predictions in the laboratory. Our data strongly support the qualitative model predictions. However, a fraction of players 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.

Suggested Citation

  • Tom‐Reiel Heggedal & Leif Helland & Espen R. Moen, 2024. "Sequential Price Setting: Theory And Evidence From A Lab Experiment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 693-727, May.
    • Handle: RePEc:wly:iecrev:v:65:y:2024:i:2:p:693-727
    DOI: 10.1111/iere.12680
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