Abstract
We study the evolutionary selection of conjectures in duopoly games when players have other regarding preferences, i.e. preferences over payoff distributions. In both the Cournot and Bertrand duopoly games, the consistent conjectures are independent of other regarding preferences. Both duopoly games have evolutionarily stable conjectures that depend on other regarding preferences but that do not coincide with the consistent conjectures. For increasingly spiteful preferences, the evolutionarily stable conjectures implicate low quantities in the Cournot game and high prices in the Bertrand game, whereas the inverse relationships hold for the consistent conjectures. We discuss our findings in the context of ultimate and proximate causation.
Highlights
Could it be the case that conjectures are consistent but that subjects are maximizing something other than profit? – Charles (Holt 1985) In many games players maximize something other than profit
In the Cournot duopoly game the conjecture equilibrium (CCE) predicts higher quantities than the Cournot-Nash equilibrium (CNE) even in the presence of other regarding preferences (ORPs), but laboratory experiments show that quantities are usually equal to or lower than those in the CNE
Huck et al (2001) find that average quantities in one-shot Cournot duopoly markets roughly correspond to the CNE quantities, and Suetens and Potters (2007) survey Bertrand experiments and find that tacit collusion is more frequent with price than with quantity
Summary
Could it be the case that conjectures are consistent but that subjects are maximizing something other than profit? – Charles (Holt 1985) In many games players maximize something other than profit. The conjectures can be assumed to result from behavior that is boundedly rational, either in belief formation (Friedman and Mezzetti 2002; Jean-Marie and Tidball 2006) or in short-term fitness maximization in the presence of evolutionary selection pressure on the conjectures (Dixon and Somma 2003; Muller and Normann 2005; Possajennikov 2009). Common to these bounded rationality approaches is that they justify the consistent conjecture, i.e. a conjecture that represents correctly anticipating the competitor’s reaction (Bresnahan 1981).
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