Focal prices and price cycles in an alternating price duopoly experiment

In the infinite horizon alternating price setting duopoly of Maskin and Tirole (1988), a focal price equilibrium and an equilibrium consisting of Edgeworth cycles coexist. In this study we investigate which of these two equilibria is more likely to emerge by means of a laboratory experiment. In 20 out of 27 observations the focal price equilibrium emerges, while price cycles are observed in only one observation. Furthermore, we study the duopoly in case of a long but finite horizon. Although the corresponding unique subgame-perfect equilibrium consists of Edgeworth cycles, experimentally we still observe a focal price in the majority of the observations. Nevertheless, price cycles are observed far more often than for the infinite horizon setting.microeconomics ;

Alternating-move Hotelling with Demand Shocks

In this paper an infinite-horizon alternating-move Hotelling model in which consumers are uniformly distributed over the market is considered. In a Markov perfect equilibrium, a seller’s move in any period depends on the price the other seller is committed to. The analytic solution is given and the unique linear Markov perfect equilibrium is computed for different values of the discount factor. The base model is then extended by the introduction of exogenous demand shocks which makes finding an analytical solution using the conventional analysis impossible. For this extended model the margin in which long-run prices fluctuate is determined for different values of the shock probability. It is found that the prices set in the high demand state are always lower than in the low demand state. Thus, our findings would support a notion of counter cyclical pricing with respect to the state of demand.Industrial Organization;

Synergies are a reason to prefer first-price auctions!

In this paper we show that in a private value setting first-price auctions can be preferred to second-price auctions. We consider a sequential auction of two objects with positive synergies and compare both auction formats. Although the second-price auction performs better in terms of efficiency and revenue, the first-price auction performs much better on a so far neglected dimension. Namely, the probability that the winner of the first object goes bankrupt is almost always higher when using the second-price rule. Our findings therefore support the common use of first-price auctions, most notably for procurement.industrial organization ;

The role of monetary incentives in prediction markets: a time series approach

Prediction markets serve as popular devices to aggregate beliefs and to assess market estimated probabilities. By looking at the interaction between real- and play-money prediction markets, this paper shows that traded volume has a significant positive effect on the probability of real- and play-money market cointegration. This indicates that the information aggregation process, eliminating individual traders'' biases, operates even when not inducing truthful belief revelation with monetary incentives. The study is based on data from four markets covering the 2008 presidential election in the United States of Americafinancial economics and financial management ;

Price dynamics and collusion under short-run price commitments

We consider a dynamic homogenous oligopoly in which firms set prices repeatedly. Theory predicts that short-run price commitments have an increasing impact on profits and may lead to less price stability. The experiments that we conduct provide support for the first effect and against the second effect when a random ending rule is applied. Application of a fixed ending rule seems to reverse these findings, but none of the effects is significant.microeconomics ;

Cognitive hierarchies in adaptive play

Inspired by the behavior in repeated guessing game experiments, we study adaptive play bypopulations containing individuals that reason with different levels of cognition. Individualsplay a higher order best response to samples from the empirical data on the history of play, wherethe order of best response is determined by their exogenously given level of cognition. As inYoung''s model of adaptive play, (unperturbed) play still converges to a minimal curb set. However,with the random perturbations of this (higher order) best response dynamic, the stochasticallystable states obtained may now be different, but in a deterministic manner. Perhapscounter-intuitively, higher cognition may actually be bad for both the individual with highercognition and his parent population.microeconomics ;

Strategic behavior in repeated voluntary contribution experiments

We conduct a repeated VCM (voluntary contribution mechanism) experiment using thestrategy method. We compare a partner and a stranger design and find that participantsin the partner treatment provide (i) higher initial contributions, (ii) higher contributionson average over all periods, and (iii) contributions that do not vary more strongly withpast contributions than participants in the stranger treatment. We conclude from ourevidence that strategic motives can account for a large share of the treatment differencestypically observed in this literature.public economics ;

Food and energy prices, government subsidies and fiscal balances in south Mediterranean countries

Just before the global crisis soaring commodity prices pushed up inflation significantly, not least in EU neighbour countries at the Mediterranean. These price shocks affected public finances in the southern Mediterranean region, notably via government subsidies. Partly due to lags in the transmission of commodity prices into prices for final users the subsidies burden continued to be felt, despite the price falls registered in the wake of the credit crisis. We show that downward price rigidities play a role. Recently, commodity price pressures have re-emerged. We focus on food prices and analyse recent developments in food inflation in Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the occupied Palestinian territories, Syria and Tunisia in comparison with other middle income economies. Subsidies on food and fuel are quantified per country for the period 2002-2010. The incremental government subsidies entail an estimated deterioration of the government balances of up to more than 2% of GDP in 2008 and, for most countries only slight improvements in the global recession year 2009. Ensuing longer-term challenges for public finances remain as inflation rises on the back of higher global economic growth. As recent events in Tunisia and Egypt illustrate, these can have important political implications. Finally, the paper discusses some options that can lead to more efficient government spending, even in the event of sharp swings in prices of basic necessities.food prices; energy prices; inflation; public finances; government subsidies

Evolution of behavior when duopolists choose prices and quantities

We study duopolistic competition in a differentiated market with firms setting prices and quantities, without explicitly imposing market clearing. Unlike the commonly adopted assumption of profit maximizing firms, we assume firm behavior to be shaped by a Darwinian dynamic: the less fitter firm imitates the fitter firm and occasionally firms may experiment with a random price and/or quantity. Our two main findings are that: (i) a market clearing outcome always belongs to the set of feasible long run outcomes, but may co-exist with non-market clearing outcomes with as well excess supply as excess demand being possible; and (ii) there exist parameter configurations for which the only feasible outcomes imply prices above monopoly level.microeconomics ;

Immaterial rewards and sanctions in a voluntary contribution experiment

In this paper, we compare the cause and effect of immaterial rewards and sanctions oncooperation in a voluntary contributions experiment. We find that both rewards andsanctions increase contributions only when subjects interact repeatedly, though rewardsseem to be more effective than sanctions. Moreover, in contrast to sanctions, rewards dohave an impact on future contributions. Although the direct effect is negative, there is apositive indirect effect that applies to subjects who contribute above (below) the groupaverage in a partner (stranger) matching. From this we conclude that sanctions andrewards are mainly used as a communication channel to coordinate on a more efficientoutcome. Nevertheless, subjects also seem to experience additional utility from receivingapproval, whereas they are insensitive to disapprovals.public economics ;