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Does nominal illusion generate collusive equilibria?

Author

Listed:
  • Enrique Fatas

    (University of East Anglia)

  • Antonio J. Morales

    (University of Malaga)

Abstract

We investigate nominal illusion in experimental duopoly markets in which firms choose first a market and then compete in prices. Markets are equivalent in real terms and only differ in the currency the price competition is run under. Our experimental results show a positive, persistent and monotone effect of the nominal exchange rate on prices. We introduce a simple equilibrium model based on invariant grids and nominal illusion. The model is consistent with the comparative statics observed in the experiment, it predicts well nominal and real price distributions across markets, and is consistent with more than 90% of the symmetric price profiles.

Suggested Citation

  • Enrique Fatas & Antonio J. Morales, 2016. "Does nominal illusion generate collusive equilibria?," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 16-06, School of Economics, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:wcbess:16-06
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    More about this item

    Keywords

    invariant grids; prominent numbers; price competition; money illusion; experiments; nominal representation;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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