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Counterintuitive number effects in experimental oligopolies

Published online by Cambridge University Press:  14 March 2025

Henrik Orzen
Henrik Orzen*
Affiliation:
School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, UK
*
e-mail: henrik.orzen@nottingham.ac.uk
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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.

Keywords

Market concentrationExperimentsTacit collusion

JEL classification

D43: Oligopoly and Other Forms of Market Imperfection C92: Laboratory, Group Behavior C72: Noncooperative Games
Type
Research Article
Information
Experimental Economics , Volume 11 , Issue 4 , December 2008 , pp. 390 - 401
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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