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Counterintuitive number effects in experimental oligopolies

Published online by Cambridge University Press:  14 March 2025

Henrik Orzen*
Affiliation:
School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, UK

Abstract

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.

Type
Research Article
Copyright
Copyright © 2007 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (http://dx.doi.org/10.1007/s10683-007-9174-0) contains supplementary material, which is available to authorized users.

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