Hostname: page-component-5cf477f64f-tx7qf Total loading time: 0 Render date: 2025-04-07T12:06:26.307Z Has data issue: false hasContentIssue false
  • English
  • Français

Counterintuitive number effects in experimental oligopolies

Published online by Cambridge University Press:  14 March 2025

Henrik Orzen
Henrik Orzen*
Affiliation:
School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, UK
*
e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Recent theoretical research on oligopolistic competition suggests that under certain conditions prices increase with the number of competing firms. However, this counterintuitive result is based on comparative-static analyses which neglect the importance of dynamic strategies in naturally-occurring markets. When firms compete repeatedly, supra-competitive prices can become sustainable but this is arguably more difficult when more firms operate in the market. This paper reports the results of laboratory experiments investigating pricing behavior in a setting in which (static) theory predicts the counterintuitive number effect. Under a random matching protocol, which retains much of the one-shot nature of the model, the data corroborates the game-theoretic prediction. Under fixed matching duopolists post substantially higher prices, whereas prices in quadropolies remain very similar. As a result, the predicted effect is no longer observed, and towards the end the reverse effect is observed.

Keywords

Market concentrationExperimentsTacit collusion

JEL classification

D43: Oligopoly and Other Forms of Market Imperfection C92: Laboratory, Group Behavior C72: Noncooperative Games
Type
Research Article
Information
Experimental Economics , Volume 11 , Issue 4 , December 2008 , pp. 390 - 401
Copyright
Copyright © 2007 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Electronic supplementary material The online version of this article (http://dx.doi.org/10.1007/s10683-007-9174-0) contains supplementary material, which is available to authorized users.

References

Abreu, D. (1986). Extremal equilibria of oligopolistic supergames. Journal of Economic Theory, 39, 191–225.CrossRefGoogle Scholar
Abreu, D. (1988). On the theory of infinitely repeated games with discounting. Econometrica, 56, 383–396.CrossRefGoogle Scholar
Andreoni, J., & Croson, R. (2007, forthcoming). Partners versus strangers: random rematching in public goods experiments. In Plott, C. & Smith, V. L. (Eds.), Handbook of experimental economics results. Amsterdam: Elsevier.Google Scholar
Benjamini, Y., & Hochberg, Y. (1995). Controlling the false discovery rate: a practical and powerful approach to multiple testing. Journal of the Royal Statistical Society (B), 57(1), 289–300.CrossRefGoogle Scholar
Chamberlin, E. H. (1929). Duopoly: value where sellers are few. Quarterly Journal of Economics, 44, 63–100.Google Scholar
Davis, D. D. (2006). Pure numbers effects and market power: new results from near continuous posted- offer markets. Working paper, Virginia Commonwealth University.Google Scholar
Deck, C.A., & Wilson, B.J. (2003). Automated pricing rules in electronic posted offer markets. Economic Inquiry, 47(2), 208–223.CrossRefGoogle Scholar
Deck, C. A., & Wilson, B. J. (2006). Tracking customer search to price discriminate. Economic Inquiry, 44(2), 280–295.CrossRefGoogle Scholar
Dufwenberg, M., & Gneezy, U. (2000). Price competition and market concentration: an experimental study. International Journal of Industrial Organization, 18, 7–22.CrossRefGoogle Scholar
Friedman, J. W. (1971). A non-cooperative equilibrium for supergames. Review of Economic Studies, 38, 1–12.CrossRefGoogle Scholar
Holt, C. A. (1985). An experimental test of the consistent-conjectures hypothesis. American Economic Review, 75, 314–325.Google Scholar
Huck, S., Normann, H.-T., & Oechssler, J. (2004). Two are few and four are many: number effects in experimental oligopolies. Journal of Economic Behavior & Organization, 53, 435–446.CrossRefGoogle Scholar
Isaac, R.M., & Reynolds, S. (2002). Two or four firms: does it matter? InC.A. Holt &R.M. Isaac (Eds.), Research in experimental economics: Vol. 9. Experiments investigating market power. Amsterdam: Elsevier.Google Scholar
Janssen, M. C. W., & Moraga-González, J. L. (2004). Strategic pricing, consumer search and the number of firms. Review of Economic Studies, 71, 1089–1118.CrossRefGoogle Scholar
Kreps, D., Milgrom, P., Roberts, J., & Wilson, R. (1982). Rational cooperation in the finitely repeated prisoners’ dilemma. Journal of Economic Theory, 27, 245–252.CrossRefGoogle Scholar
Morgan, J., Orzen, H., & Sefton, M. (2006). An experimental study of price dispersion. Games and Economic Behavior, 54, 134–158.CrossRefGoogle Scholar
Normann, H. T., & Wallace, B. (2006). The impact of the termination rule on cooperation in a prisoner's dilemma experiment. Working paper, Royal Holloway and UCL.Google Scholar
Rosenthal, R. W. (1980). A model in which an increase in the number of sellers leads to a higher price. Econometrica, 48, 1575–1579.CrossRefGoogle Scholar
Satterthwaite, M. A. (1979). Consumer information, equilibrium industry price, and the number of sellers. Bell Journal of Economics, 10, 483–502.CrossRefGoogle Scholar
Selten, R., & Stoecker, R. (1986). End behavior in sequences of finite prisoner's dilemma supergames— A learning theory approach. Journal of Economic Behavior & Organization, 7, 47–70.CrossRefGoogle Scholar
Stiglitz, J. E. (1987). Competition and the number of firms in a market: are duopolies more competitive than atomistic markets? Journal of Political Economy, 95, 1041–1061.CrossRefGoogle Scholar
Varian, H. R. (1980). A model of sales. American Economic Review, 70, 651–659.Google Scholar
Supplementary material: File

Orzen supplementary material

Orzen supplementary material
Download Orzen supplementary material(File)
File 29.2 KB