Group dynamics in experimental studies—The Bertrand Paradox revisited

• Published in: Journal of economic behavior & organization Vol. 69; no. 1; pp. 51 - 63
• Main Author: Bruttel, Lisa V.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.01.2009; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Economic Behavior & Organization
• Subjects: Bertrand duopoly; Bertrand duopoly Tacit collusion Learning Leadership by example Experiment; Convergence; Duopoly; Economic information; Experiment; Experiments; Game theory; Group dynamics; Information sharing; Leadership; Leadership by example; Learning; Market analysis; Markets; Nash equilibrium; Prices; Studies; Tacit collusion; Learning; D43; Leadership by example; Tacit collusion; Experiment; Bertrand duopoly; C92; D83; C72; Social Sciences & Humanities
• ISSN: 0167-2681; 1879-1751; 0167-2681
• DOI: 10.1016/j.jebo.2008.10.002

Different information provision in experimental markets can drastically change subjects’ behavior. Considering the repeated Bertrand duopoly game of Dufwenberg and Gneezy [Dufwenberg, M., Gneezy's, U., 2000. Price competition and market concentration: an experimental study. International Journal of Industrial Organization 18, 7–22.], we find that population feedback about the prices in other markets outside a subjects’ own current market causes group dynamics that prevent prices from convergence to Nash equilibrium. Limited information comprising only the decisions of a subject’s own opponent, in contrast, leads to competitive behavior. When we extend the number of periods from 10 to 25 in the full information treatment (FULL) we observe a very robust cyclical up and down movement of prices. We can explain tacit coordination in our experiment with an extended learning direction model and leadership by example.