Experimental Oligopoly Research Articles

Virtual social networking increases the individual's economic predictability

Forecasting economic choice is hard because today we still do not know enough about human motivation. A fundamental problem is the lack of knowledge about how the neural networks in the brain give rise to thinking and decision making. One way to address the issue has been to develop simplified economic experiments, in which participants need skills of little complexity and their minds employ cognitive mechanisms, already well understood by mathematical psychology and neuroscience. Here we take a neural model for rudimentary emotion generation and memorizing and use it as a guiding theory to understand decision making in an experimental oligopoly market. For the first time in that line of research, participants are put in a lab virtual social network serving to exchange opinions about deals with companies. On average, choices become significantly more predictable when people participate in the network, in contrast to working alone with expert information. Calibrating the model for each person, we find that some people are predicted with startling precision.

Algorithms, Machine Learning, and Collusion

This paper discusses the question whether self-learning price-setting algorithms are able to coordinate their pricing behaviour to achieve a collusive outcome that maximizes the joint profits of the firms using these algorithms. While the legal literature generally assumes that algorithmic collusion is indeed possible and in fact very easy, the computer science literature on cooperation between algorithms as well as the economics literature on collusion in experimental oligopolies indicate that a coordinated and in particular tacitly collusive behaviour is in general rather difficult to achieve. Many studies have shown that some form of communication is of vital importance for collusion if there are more than two firms in a market. Communication between algorithms is also a topic in artificial intelligence research and some recent contributions indicate that algorithms may learn to communicate, albeit in a rather limited way. This leads to the conclusion that algorithmic collusion is currently much more difficult to achieve than often assumed in the legal literature and is therefore currently not a particularly important competitive concern. In addition, there are also several legal problems associated with algorithmic collusion, for example, questions of liability, of auditing and monitoring algorithms as well as enforcement. The limited resources of competition authorities should rather be devoted to more pressing problems as, for example, the abuse of dominant positions by large online-platforms.

ALGORITHMS, MACHINE LEARNING, AND COLLUSION

AbstractThis paper discusses whether self-learning price-setting algorithms can coordinate their pricing behavior to achieve a collusive outcome that maximizes the joint profits of the firms using them. Although legal scholars have generally assumed that algorithmic collusion is not only possible but also exceptionally easy, computer scientists examining cooperation between algorithms as well as economists investigating collusion in experimental oligopolies have countered that coordinated, tacitly collusive behavior is not as rapid, easy, or even inevitable as often suggested. Research in experimental economics has shown that the exchange of information is vital to collusion when more than two firms operate within a given market. Communication between algorithms is also a topic in research on artificial intelligence, in which some scholars have recently indicated that algorithms can learn to communicate, albeit in somewhat limited ways. Taken together, algorithmic collusion currently seems far more difficult to achieve than legal scholars have often assumed and is thus not a particularly relevant competitive concern at present. Moreover, there are several legal problems associated with algorithmic collusion, including questions of liability, of auditing and monitoring algorithms, and of enforcing competition law.

An oligopoly model with rational and imitation rules

In the rank of behavioral rules, imitation-based heuristics have received special attention in economics (see Vega-Redondo, 1997; Schlag, 1998). In particular, imitative behavior explains the evidence from experimental oligopolies where the Cournot–Nash equilibrium does not emerge as unique outcome and outputs are placed, for the most part, on fairly competitive levels (see e.g. Apesteguia et al., 2006 and Oechssler et al., 2016). Here, we derive a dynamic model of a linear Cournot oligopoly with a deterministic structure where rational agents having perfect foresight and imitators are present. The Cournot–Nash equilibrium is a stationary state of our models together with a further production level that can be interpreted as the competitive equilibrium in case only imitators are present. We found that the heterogeneities among players influence the stability properties of the Cournot–Nash equilibrium and the arising dynamical scenarios are characterized by similar features as those from experimental outcomes.

Number Effects and Tacit Collusion in Experimental Oligopolies

We systematically investigate the relationship between the number of firms in a market and tacit collusion by means of a meta‐analysis of the literature on oligopoly experiments as well as two of our own experiments with a total of 368 participants. We show that the degree of tacit collusion decreases strictly with the number of competitors in industries with two, three and four firms. Although previous literature could not affirm that triopolies are more collusive than quadropolies, we provide evidence for this fact for symmetric and asymmetric firms under Bertrand and Cournot competition.

An oligopoly model with best response and imitation rules

Imitation-based behaviors are considered in economics with significant contributions in reference to homogeneous populations where players are characterized by the same decisional processes (see for example [42,48]). However, the presence of imitation behaviors is detected in experimental oligopolies coexisting with rational-like rules. This motivates us to consider an heterogeneous population where best responders and imitators coexist and compete in a deterministic oligopoly framework. The model we formulate is characterized by two stationary states, specifically the Cournot–Nash equilibrium and a further production level at which best responders are inactive and imitators produce at the marked clearing price. The heterogeneities among players give to the model a nonlinear structure, influence the stability properties of the Cournot–Nash equilibrium and give rise to complex dynamic scenarios. We found that the imitators’ relative fraction have an ambiguous role in determining the stability properties of the Cournot–Nash equilibrium and, provided intermediate values of the population size, its variations may cause the occurrence of both flip and Neimark–Sacker bifurcations. Chaotic dynamics and coexistent attractors, characterized by not connected basins, may also be observed. We finally note that certain dynamic regimes, described by the model, are provided by analogous features as those characterizing experimental outcomes and several experiments can be reproduced with different parameters’ sets.

Experimental oligopolies modeling: A dynamic approach based on heterogeneous behaviors

In the rank of behavioral rules, imitation-based heuristics has received special attention in economics (see [14] and [12]). In particular, imitative behavior is considered in order to understand the evidences arising in experimental oligopolies which reveal that the Cournot-Nash equilibrium does not emerge as unique outcome and show that an important component of the production at the competitive level is observed (see e.g.[1,3,9] or [7,10]). By considering the pioneering groundbreaking approach of [2], we build a dynamical model of linear oligopolies where heterogeneous decision mechanisms of players are made explicit. In particular, we consider two different types of quantity setting players characterized by different decision mechanisms that coexist and operate simultaneously: agents that adaptively adjust their choices towards the direction that increases their profit are embedded with imitator agents. The latter ones use a particular form of proportional imitation rule that considers the awareness about the presence of strategic interactions. It is noteworthy that the Cournot-Nash outcome is a stationary state of our models. Our thesis is that the chaotic dynamics arousing from a dynamical model, where heterogeneous players are considered, are capable to qualitatively reproduce the outcomes of experimental oligopolies.

Firm-specific information and explicit collusion in experimental oligopolies

We experimentally study the effect of information about competitors’ actions on cartel stability and firms’ incentives to form cartels in Cournot markets. As in previous experiments, markets become very competitive when individualized information is available and participants cannot communicate. In contrast, when communication is possible, results reverse: markets become less competitive and cartels become more stable when individualized information is available. We also observe that the extra profits that firms obtain thanks to the possibility to communicate are higher when individualized information is present, suggesting that firms have greater incentives to form cartels in that situation.

The effect of payoff tables on experimental oligopoly behavior

We explore the effects of the provision of an information-processing instrument—payoff tables—on behavior in experimental oligopolies. In one experimental setting, subjects have access to payoff tables whereas in the other setting they have not. It turns out that this minor variation in presentation has non-negligible effects on participants’ behavior, particularly in the initial phase of the experiment. In the presence of payoff tables, subjects tend to be more cooperative. As a consequence, collusive behavior is more likely and quickly to occur.

Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market*

This paper analyses dynamic pricing in markets with network externalities. Network externalities imply demand inertia, because the size of a network increases the usefulness of the product for consumers. Because past sales increase current demand, firms have an incentive to set low introductory prices to be able to increase prices as their networks grow. However, in reality we observe decreasing prices. This could be due to other factors dominating the network effects. We use an experimental duopoly market with demand inertia to isolate the effect of network externalities. We find that experimental prices are consistent with real world observations rather than with theoretical predictions.

Counterintuitive number effects in experimental oligopolies

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.

Two are few and four are many: number effects in experimental oligopolies

In this paper we investigate how the competitiveness of Cournot markets varies with the number of firms in an industry. We review previous Cournot experiments in the literature. Additionally, we conduct a new series of experiments studying oligopolies with two, three, four, and five firms in a unified frame. With two firms we find some collusion. Three-firm oligopolies tend to produce outputs at the Nash level. Markets with four or five firms are never collusive and typically settle at or above the Cournot outcome. Some of those markets are actually quite competitive with outputs close to the Walrasian outcome.

Market volatility and inequality in earnings: experimental evidence

We analyze the volatility of actions in experimental oligopoly markets. Can the volatility, measured as the total variation in actions, be predicted by inequality in earnings of the previous period? We examine two types of differentiated markets, Cournot and Bertrand, and two informational conditions. We find for both types of markets and regardless of the information available to firms that inequality in earnings is a major factor for explaining volatility. The more equal profits are distributed, the less volatility is observed.

Multiproduct activity in an experimental differentiated oligopoly

In a symmetric differentiated experimental oligopoly with multiproduct firms we test the predictive power of the corresponding Bertrand-Nash equilibria. Subjects are not informed on the specification of the underlying demand model. In the presence of intense multiproduct activity, and provided that a parallel pricing rule is imposed to multiproduct firms, strategies tend to confirm the non-cooperative multiproduct solution.

Quantity precommitment in an experimental oligopoly market

The paper describes an experiment designed to test if the equilibrium in a market characterized by capacity precommitment followed by price competition, as in the Kreps and Scheinkman model, conforms with the outcome predicted by that model, which is that capacities coincide with Cournot output levels. Sessions were run with capacity precommitment in inexperienced and experienced triopoly markets. The conclusion is that with inexperienced subjects capacity choices are more rivalistic than the model suggests, but in line with those of the Cournot experiments by Fouraker and Siegel. With experienced subjects capacities are quite close to the prediction of the Kreps and Scheinkman model.

Does information about competitors’ actions increase or decrease competition in experimental oligopoly markets?

This paper investigates the impact the publication of firm-specific data has on the competitiveness of experimental oligopoly markets. We compare two treatments: in one, firms are informed about their rivals’ actions and profits. In the other, firms are only given aggregate information about their rivals’ actions (average quantities or prices). We find that more information leads to more competition. In the treatment where aggregate information is given, we confirm the theoretical result that Bertrand markets are more competitive than Cournot markets.

Market entry: An experimental investigation

Experimental oligopoly markets for homogeneous products were conducted to investigate cooperative behaviors when subjects were allowed to choose whether or not to enter the market. Two types of games were designed. One was a one-stage game in which subjects were given a payoff table and asked only to make an entry decision; the other was a two-stage game in which subjects had to decide whether or not to enter and then compete either in prices or in quantities. Data indicated a significant tendency to establish entry cycles, with players entering one at a time, in the one-stage “price-setting” markets. On the contrary, this tendency was never observed in the one-stage “quantity-setting” markets. The results in the two-stage game reinforced the difference in the observed behaviors between the price- and quantity-setting markets. In the former, subjects generally behaved in conformity with the Nash equilibrium predictions, whereas in the latter these predictions were not observed.

Focal points and pricing behavior: Results in an experimental oligopoly

The problem of describing and predicting oligopoly outcomes is an old one in economics. It is well known that some real world oligopolies continue for long periods of time with Cournot-like price structures, while others attain price and output levels approximating that of a monopolist. A number of authors have suggested that an understanding of these different results may be aided by a concern for the mechanisms of tacit communication in oligopoly (6, 7, 13, 14). By these tacit communication mechanisms, oligo-polists may convey information regarding their expectations and intents (11, pp. 179–182). In this article, the use of focal point pricing as a tacit communication mechanism is investigated in the context of an experimental oligopoly.

Like and dislike in an experimental oligopoly: A structure-conduct-performance analysis

Like and dislike in an experimental oligopoly: A structure-conduct-performance analysis