Price Signaling in Experimental Oligopoly
Abstract
We report here a few results of oligopoly experiments which we carried out several years ago. These are laboratory experiments with human subjects along the lines of Lawrence Fouraker and Sidney Siegel (1963), Friedman (1967) and Hoggatt (1969). We sought to observe the predictive power of various theoretical equilibria. Then, to the extent that theoretical equilibria do not predict observed behavior, we seek to understand that behavior as best we can in the hope that the existing body of theoretical knowledge can be improved upon. We used a simple textbook model of an oligopoly, then arranged for undergraduate student subjects to be the in the market. Our markets have 2, 3, 4 or 6 firms, each represented by one subject. One single consists of a period of 1 X2 to 2 hours during which one group of subjects forms a market. For example, in a 3-firm market there would be 3 subjects each in a different room in the laboratory. Each would make the price and output decisions for his firm, and the pay to each for his participation in the game would consist only of the profits of his firm. At the beginning of the game, each would make the price and output decisions for his firm, and the pay to each for his participation in the game would consist only of the profits of his firm. At the beginning of the game, each subject would make his initial price and output decision. These initial decisions would remain in effect until changed by a subject; and he would be free to change either his price or output (or both) at any time. A particular game or market with its fixed set of firms (subjects) would remain in continuous operation for approximately an hour and a half. The time periods are approximately 40 seconds each; and every fourth period, the subject receives a report on his sales, production, inventory, profit, etc. These time periods are sufficiently short that they approximate continuous time for the subject, especially given that there is not time in the whole game, except the beginning, when the subject must actively choose a price and an output level. Anytime afterward he can change his price and/or output level by entering new ones. They take effect at the start of the time period following. Our experimental design was chosen with several objectives in mind: casual evidence, formal evidence (Friedman 1967), and intuition all suggest that sub* Professor of business administration, University of California, Berkeley, Professor of economics, University of Rochester, and Research Assistant, Center for Research in Management Science, University of California, Berkeley, respectively. We are grateful for research support to the National Science Foundation for GS-2423 and GS-2463, to the University of Rochester and to the University of California. The Center for Research in Management Science, Berkeley, where this research was carried out, operates a computer controlled laboratory for the study of human behavior. A manual describing the experimental control programs and the observations on which this paper is based is available on request.
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