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Price Competition Between Teams

Published online by Cambridge University Press:  14 March 2025

Gary Bornstein  and
Uri Gneezy
Gary Bornstein*
Affiliation:
Department of Psychology and Center for Rationality and Interactive Decision Theory, The Hebrew University of Jerusalem, Jerusalem 91905, Israel
Uri Gneezy
Affiliation:
University of Chicago, Graduate School of Business and Faculty of Industrial Engineering and Management, Technion, Israel
*
email: MSGARY@mscc.huji.ac.il
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Abstract

This study uses an experimental approach to examine whether markets are sensitive to the internal incentive structure of the competitors. Toward this goal, we modeled the competitors in a price competition duopoly game as three-player teams. Each player simultaneously declares a bid (price) and the team whose total bid was lower won the competition and was paid accordingly. The losing team was paid nothing, and in case of a tie, each team was paid half its price. This duopoly game was studied under two conditions; a cooperative treatment in which the team's profit was divided equally amongst its members and a non-cooperative one in which each individual member was paid her own bid. Whereas the Nash equilibrium is for each player in either treatment to demand the minimal price possible, we predicted that convergence to the competitive price would be much faster in the cooperative treatment than in the non-cooperative one. The experimental results firmly confirmed this prediction.

Keywords

price competitionteam games

JEL classification

L11: Production, Pricing, and Market Structure • Size Distribution of Firms C92: Laboratory, Group Behavior
Type
Research Article
Information
Experimental Economics , Volume 5 , Issue 1 , June 2002 , pp. 29 - 38
Copyright
Copyright © 2002 Economic Science Association

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Footnotes

1

This research was supported by a grant from the Israel Science Foundation and is part of the EU-TMR Research Network ENDEAR (FMRX-CT98-0238).

†

Author to whom correspondence should be addressed.

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