Price Wars or Agreements?

Experimental economics

Neoclassical economics is based on the assumption of the perfect rationality of the economic agent. It implies that in any circumstance, the agent follows strict financial rules and acts as an ideal computational machine evaluating correctly the most complicated decision problems. Surprisingly, you find many contradictions if you observe the world around you.

Examples

1. beggars expecting to get some contributions just for free
2. children getting money from their parents
3. advertisement and its influence
4. conflicting decisions in games with monetary payoffs

Scientists The Nobel prize winners for their discoveries are V. Smith, D. Kahneman, R. Thaller, E. Duflo, and others. The scientists formulated a new stream of economic thinking - Behavioural economics, which has been frequently used in laboratories.

Game Theory The experiment is based on a bimatrix game formulated first by the most recognized mathematician of the previous century - János Neumann. (J. Neumann - O. Morgenstern: Game Theory and Behaviour of Economics Systems). The other recognized Game Theory Nobel Prize winner is Harsanyi, also of Hungarian origin.

Experiment

Two monopolies (Lidl and Billa) decide whether to raise or keep the prices of beer low. Their respective payments are given in the bimatrix table

Payoffs the Bimatrix price game between Billa and Lidl

Billa \ Lidl	High	Low
High	3 \ 3	0 \ 5
Low	5 \ 0	2 \ 2

The game payoff interpretation

• If both monopolies increase the prices, the customers do not react, and the revenues of both monopolies rise up (3 \ 3).
• If one of the monopolies raises its prices, but the second one keeps the strategy of low prices, the first one will lose the whole market as the customers will prefer going to its competitor [(5 \ 0) or (0 \ 5)].
• If both monopolies keep the low prices, both of them will continue having small revenues (2 \ 2)

Short additional instructions for the moderator

• The students will be randomly matched to the pairs
• The roles of the Column player of the Row player will be assigned to each student randomly
• Under the previously given settings, the students are going to play eight simulation rounds
• The winner will be identified by his//her highest cumulative payoffs after the 8th round

Veconlab game

The experiment will run within the Vecon Lab Game environment of the University of Virginia.