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Setting the Anchor: Price Competition, Level-n Theory and Communication

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Abstract

This paper analyzes communication from the viewpoint of the level-n theory of bounded rationality. It examines if communication can be understood by the effect it has on high-level types’ beliefs about the actions of simpleminded level-0 players. We present experimental evidence from a slightly perturbed price competition game designed to test this interpretation. The main finding is that communication affects subjects in a way that seems compatible with the level-n 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-n model does crucially depend on the possibility for high level players to form homogenous beliefs about the behavior of the level-0 players.

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  • Wengström, Erik, 2007. "Setting the Anchor: Price Competition, Level-n Theory and Communication," Working Papers 2007:6, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2007_006
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    More about this item

    Keywords

    Noncooperative Game Theory; Communication; Bounded Rationality; Experiments;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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