Essays on pricing in experimental duopoly markets

Shakun Datta, Purdue University

Abstract

This dissertation comprises of 3 essays that analyze the firm pricing behavior in duopolistic experimental markets. The first essay examines whether the content of buyer information and the timing of its dissemination affect firms' market power. We construct laboratory markets based on a costly search, differentiated goods model analyzed by Anderson and Renault (2000). The model provides a ranking of prices based on whether buyers receive information on price or product characteristics under different timing assumptions, generating four experimental treatments. Contrary to simple intuition, the model predicts that the presence of partially informed buyers increases the equilibrium price. Laboratory data support this negative externality prediction when sellers face a large number of automated buyers that are programmed to follow the optimal search strategy. With human buyers, however, excessive search instigates increased price competition and sellers post prices that are significantly lower than predicted. The second essay uses experimental methods to demonstrate the anti-competitive potential of competitor-based price matching guarantees in both symmetric and asymmetric cost duopolies. Our findings establish that when costs are symmetric, price-matching guarantees significantly increase the market price. In case of asymmetric costs, however, the ability of price guarantees to act as a collusion facilitating device is contingent on the relative cost difference. In the laboratory, the lesser use of guarantees combined with lower average prices and slower convergence to the collusive level, suggest that cost asymmetry curtails collusive behavior. In the third essay, we investigate the effect of firm size asymmetry on the emergence of price leadership in a homogeneous good duopoly model similar to Deneckere and Kovenock (1992). With discounting, the model predicts that the large firm will emerge as the price leader in the unique subgame-perfect equilibrium. We employ level of size asymmetry, preplay communication and subjects' experience under exogenously specified leader-follower roles as the main treatment variables. Independent of the level of size asymmetry, price leadership by the large firm is one of the two most frequently observed timings of price announcements. While laboratory data do not fully support the model's price prediction, observed prices are close to the equilibrium when large firm is the leader.

Degree

Ph.D.

Advisors

Cason, Purdue University.

Subject Area

Economics|Business costs

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