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A LABORATORY STUDY OF DUOPOLY PRICE COMPETITION WITH PATIENT BUYERS

Authors

  • TIMOTHY N. CASON,

    1. Cason: Department of Economics, Krannert School of Management, Purdue University, West Lafayette, IN 47907. Phone 765-494-1737, Fax 765-494-9658, E-mail cason@purdue.edu
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  • SHAKUN D. MAGO

    1. Mago: Department of Economics, Robins School of Business, University of Richmond, Richmond, VA 23173. Phone 804-287-6631, Fax 804-289-8878, E-mail sdatta@richmond.edu
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    • We thank University of Richmond for providing subject payments to conduct this experiment, and two anonymous referees and audiences at ESA and SEA conferences for valuable feedback. Justin Krieg and Jingjing Zhang provided excellent research assistance.


Abstract

This article reports a duopoly experiment in which sellers compete to sell to a potentially patient buyer. Each period sellers simultaneously post prices and the buyer costlessly observes either one or both prices. The buyer can then either accept an observed price or reject all offers. Following a rejection, sellers may have an opportunity to post prices again in another round. We study how the duopolists' pricing behavior responds to changes in the likelihood of the buyer observing multiple prices, γ, and the probability of continuing to another round, δ. The unique stationary equilibrium features mixed strategies. Consistent with the equilibrium, observed prices are decreasing in γ and δ. Contrary to the equilibrium, however, buyers sometimes reject profitable price offers, and average prices are lower than predicted when only one round of offers is possible and higher than predicted in the multiple-round game. (JEL D43, D83, L13)

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