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EXPERIMENTAL EVIDENCE OF A SUNK‐COST PARADOX: A STUDY OF PRICING BEHAVIOR IN BERTRAND–EDGEWORTH DUOPOLY *
Author(s) -
Buchheit Steve,
Feltovich Nick
Publication year - 2011
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2011.00630.x
Subject(s) - sunk costs , duopoly , economics , microeconomics , bertrand competition , econometrics , oligopoly , cournot competition
We experimentally test the effect of sunk costs on decision making. In the experiment, subjects play the role of price‐setting duopolists. Both firms have identical costs, including an exogenous sunk cost that varies across sessions over six different values. We observe that the sunk cost has a U‐shaped effect: From low to medium levels, average prices decrease, but from medium to high levels, average prices increase. This effect, which is consistent with loss avoidance, develops quickly and persists throughout the game. A follow‐up experiment confirms the main results of the original experiment.