Limited rationality and the strategic environment: Further evidence from a pricing game

Abstract

A classic issue in behavioral economics is the extent to which agents who make systematic mistakes have large effects on market outcomes. One perspective is that agents who make systematic mistakes have large effects on outcomes in settings characterized by strategic complementarity, but not in settings characterized by strategic substitutability. In this paper, we extend the experimental approach based on this perspective found in Cooper, Schneider, and Waldman (2017) concerning beauty contest experiments to the pricing game initially investigated in Fehr and Tyran (2008). Our main results are as follows: i) given strategic complementarity and multiple identical shocks, convergence to equilibrium play after an initial shock and the initial subsequent shocks is not immediate even though the shocks are identical; ii) the periodic introduction of inexperienced players given strategic complementarity slows down speed of convergence to equilibrium play; and iii) behavior in the pricing game given strategic complementarity shows faster post-shock convergence after later shocks than we found in our earlier paper for the beauty contest. In addition to showing these results, we discuss what the two papers suggest concerning how to model settings characterized by agents who vary in terms of their abilities to process information and form expectations.