Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82892
Authors: 
Dufwenberg, Martin
Gneezy, Uri
Year of Publication: 
1998
Series/Report no.: 
Working Paper, Department of Economics, Uppsala University 1998:8
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. Many theoretical problems with the original model have been considered as an explanation of the paradox in the literature. In this paper we experimentally investigate a model which is immune to the theoretical critique of the original model. We find, nevertheless, that the outcome does 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 are provided it tends to predict well when the number of competitors is three or four. A bounded rationality explanation of this is suggested.
Subjects: 
Price competition
Bertrand model
market concentration
experiment
learning
JEL: 
C90
D43
Document Type: 
Working Paper

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