SFB 303 Discussion Paper No. B - 220
Author: Keser, Claudia
Title: Learning to Cooperate in Experiments on Multistage Price-Setting Duopolies with Symmetric Costs
Abstract: This article reports the results of experiments where subjects played a symmetric dynamic duopoly game
twice. In this game two firms, facing the same unit cost of production, offer a homogeneous product during
twenty-five periods. Prices in each period are the only decision variables. The dynamic relationship arises
because sales depend not only on current prices but also on past sales. According to game-theory, this
multiperiod duopoly game has a unique subgame perfect equilibrium solution. However, actual individual price-
setting behavior of subjects in the multiperiod duopoly situation is different from what is prescribed by the
subgame perfect equilibrium solution. This is not very surprising in view of the subgame perfect equilibrium
solution being too complicated to be computed by a subject in the experimental game-playing situation. We
might suspect, however, that average behavior is quite well described by the equilibrium solution. We find that
in each period the average prices over all markets are above the subgame perfect equilibrium prices.
Nevertheless, the average realized long-run profit is not significantly different from the profit which would be
gained in the subgame perfect equilibrium solution. When subjects play the game for a second time, the average
price level even increases and thus gets closer to the symmetric Pareto efficient price level. Furthermore, price
behavior tends to be more stable in the second plays than in the first ones. We may conclude that experience in
playing the game increases the subjects' cooperativeness. The more cooperative behavior in the second plays
leads to profits which are significantly higher than the profits in the subgame perfect equilibrium solution.
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