Dissertation abstract: Essays on pricing in experimental duopoly markets

Abstract

This dissertation comprises three independent essays that analyze pricing behavior in experimental duopoly markets. The first essay examines whether the content of buyer information and the timing of its dissemination affects seller market power. We construct laboratory markets with differentiated goods and costly buyer search in which sellers simultaneously post prices. The experiment varies the information on price or product characteristics that buyers learn under different timing assumptions (pre- and post-search), generating four information treatments. Theory predicts that price information lowers the equilibrium price, but information about product characteristics increases the equilibrium price. That is, contrary to simple intuition, presence of informed buyers may impart a negative externality on other uninformed buyers. The data support the model's negative externality result when sellers face a large number of robot buyers that are programmed to search optimally. Observed prices conform to the model's comparative statics and are broadly consistent with predicted levels. With human buyers, however, excessive search instigates increased price competition and sellers post prices that are significantly lower than predicted. The second essay uses experimental methods to demonstrate the anti-competitive potential of price-matching guarantees in both symmetric and asymmetric cost duopolies. When costs are symmetric, price-matching guarantees increase the posted prices to the collusive level. With asymmetric costs, guaranteed prices remain high relative to prices without the use of guarantees, but the overall ability of guarantees to act as a collusion facilitating device depends on the relative cost difference. Fewer guarantees, combined with lower average prices, suggest that cost asymmetries may discourage collusion. The third essay investigates the effect of firm size asymmetry on the emergence of price leadership in a homogeneous good duopoly. With discounting, the unique subgame-perfect equilibrium predicts that the large firm will emerge as the endogenous price leader. Independent of the level of size asymmetry, the laboratory data indicates that price leadership by the large firm is one of the most frequently observed timings of price announcement. In most cases, however, it comes second to simultaneous price-setting. This tendency to wait for the other firm to announce its price is especially strong when the level of size asymmetry between firms is low. We attribute the lower than expected frequency of price leadership to coordination failure, which is further compounded by elements of inequity aversion.