Abstract
The classical price competition model (named after Bertrand), prescribes that in equilibrium prices are equal to marginal costs. Moreover, prices do not depend on the number of competitors. Since this outcome is not in line with real-life observations, it is known as the 'Bertrand Paradox.' In experimental price competition markets we find that prices do depend on the number of competitors: the Bertrand solution does not predict well when the number of competitors is two, but (after some opportunities for learning) predicts well when the number of competitors is three or four. A bounded rationality explanation of this is suggested.
Original language | English (US) |
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Pages (from-to) | 7-22 |
Number of pages | 16 |
Journal | International Journal of Industrial Organization |
Volume | 18 |
Issue number | 1 |
DOIs | |
State | Published - Jan 2000 |
Externally published | Yes |
Keywords
- Bertrand model
- Bounded rationality
- C92
- Experiment
- L13
- Market concentration
- Noise-bidding
- Price competition
ASJC Scopus subject areas
- Industrial relations
- Aerospace Engineering
- Economics and Econometrics
- Economics, Econometrics and Finance (miscellaneous)
- Strategy and Management
- Industrial and Manufacturing Engineering