An experiment on spatial price competition

Abstract

This paper investigates price competition in a segmented market. Each segment contains one seller and one consumer, and consumers incur transportation costs when they buy from a seller located in another segment. We consider several competing theoretical solutions to this game and compare the outcomes of a laboratory experiment against these. We find that mixed strategy equilibrium predictions from the analysis of a static model perform better than alternative benchmarks in organizing the data. In particular we observe persistent price dispersion, we find that larger markets are more competitive, and we find that competitive pressures in large markets preclude sellers from exploiting higher consumers' willingness to pay.