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Bertrand-Edgeworth Competition in Experimental Markets

Jamie Brown Kruse
Stephen Rassenti
Stanley S. Reynolds
Vernon L. Smith

Abstract

The Bertrand-Edgeworth (BE) model describes competition among a group of price setting sellers, each of whom faces a production capacity constraint. We report on laboratory experiments that were designed so as to capture essential features of BE competition. These experiments permit us to evaluate different theories of BE competition: Competitive equilibrium (CE) pricing, Edgeworth cycles in prices, mixed strategy Nash equilibrium (NE) in prices, and tacit collusion. The experimental results 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 adjusted their prices partially to their predicted Edgeworth price. The Edgeworth cycle theory is the only theory that predicts the kind of time dependence and cycling that was observed in most experiments.