Bargaining with Confirmed Proposals: An Experimental Analysis of Tacit Collusion in Cournot and Bertrand Duopolies

We investigate theoretically and experimentally the performance of a bargaining-overstrategies protocol with confirmed proposals, with either symmetric (i.e., alternating among the two players) or asymmetric power of confirmation (i.e., assigned to one of the two players alone). We apply it both to a Bertrand duopoly market, in which competition is on prices, and to a Cournot duopoly market, in which players compete on the amount of output they produce. We characterize the set of subgame perfect equilibrium outcomes of the bargaining game with confirmed proposals for each of the four combinations of confirmation power and market game, and formulate theory-driven hypotheses based on these different characterizations. Our experimental results show that bargaining over strategies of price- or quantity-setting (i) acts as a communication device in competitive environments, (ii) increases the level of collusion, and (iii) reduces the bargaining length. In particular, we report experimental evidence of overall better performance of a Bertrand duopoly market in reaching an equitable, welfare-maximizing, and Pareto-efficient agreement. However, competing in price rather than in quantity setting reduces the bargaining length only under asymmetric power of confirmation, while under symmetric power price-setting only has a second-order effect on reducing the bargaining length. We complement the data analysis with a qualitative analysis of the sequence of players' declared strategies as communication devices.