BERTRAND-EDGEWORTH COMPETITION IN EXPERIMENTAL MARKETS

The Bertrand-Edgeworth (BE) model describes competition among a group of price setting sellers, each of whom faces a production capacity con straint. We report on laboratory experiments that were designed so as to capture essential features of BE competition. These experiments per mit us to evaluate different theories of BE competition: Competitive e quilibrium (CE) pricing, Edgeworth cycles in prices, mixed strategy Na sh equilibrium (NE) in prices, and tacit collusion. The experimental r esults indicate that while each of the theories helps to explain some aspects of the data, none of these theories are completely consistent with the data. In relative terms, the Edgeworth cycle theory provides better predictions than the other three theories. Most sellers adjuste d their prices partially to their predicted Edgeworth price. The Edgew orth cycle theory is the only theory that predicts the kind of time de pendence and cycling that was observed in most experiments.