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Explaining Price Dispersion and Dynamics in Laboratory B ertrand Markets
Author(s) -
Bayer RalphC.,
Wu Hang,
Chan Mickey
Publication year - 2014
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12066
Subject(s) - economics , price dispersion , contrast (vision) , dynamics (music) , microeconomics , dispersion (optics) , econometrics , work (physics) , computer science , psychology , physics , pedagogy , artificial intelligence , optics , thermodynamics
This paper proposes a quantal response learning model to explain sellers' pricing and learning behaviour observed in a laboratory B ertrand market experiment. In the model, sellers hold beliefs about their opponents' strategies and play quantal best responses to these beliefs. After each round, sellers update their beliefs based on the information learned from previous play. The results indicate that when sellers have full past price information, the model explains the price distributions within periods and the dynamics across periods. The fit is particularly good if one allows for sellers being risk averse. In contrast, quantal response equilibrium does not work well.