Price competition and market concentration: an experimental study

The classical price competition model (named after Bertrand), prescribes th at in equilibrium prices are equal to marginal costs. Moreover, prices do n ot depend on the number of competitors. Since this outcome is not in line w ith real-life observations, it is known as the 'Bertrand Paradox.' In exper imental price competition markets we find that prices do depend on the numb er of competitors: the Bertrand solution does not predict well when the num ber of competitors is two, but (after some opportunities for learning) pred icts well when the number of competitors is three or four. A bounded ration ality explanation of this is suggested. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: C92; L13.