Price Increasing Competition? Experimental Evidence

Economic intuition suggests that increased competition generates lower prices. However, recent theoretical work shows that a monopolist may charge a lower price than a firm facing a competitor selling a differentiated product. The direction of the price change when competition is introduced is dependent upon the joint distribution of buyer values for the two products. The authors explore this relationship using controlled laboratory experiments. These results indicate that the distribution of buyer values does affect prices in a manner consistent with the theoretical predictions, although price increasing competition is rare due in part to overly intense competition regardless of the distribution of buyer values. Theyalso explore pricing dynamics and find that sellers are more sensitive to their rivals when buyer values are positively correlated.

Provided by: University of Arkansas Topic: Tech Industry Date Added: Jan 2011 Format: PDF

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