Price increasing competition? Experimental evidence

Economic intuition suggests competition lowers prices. However, recent theoretical work reveals a monopolist may prefer to charge a lower price than a seller facing a competitor with a differentiated product depending upon the joint distribution of buyer values for the products. We explore this relationship using controlled laboratory experiments. Our results indicate price increasing competition is rare due in part to overly intense competition, but after controlling for such behavioral reactions, we find some support for the model. We also explore pricing dynamics and find that sellers are more sensitive to their rivals when buyer values are positively correlated.

► We experimentally find modest support for price increasing competition. ► Duopoly sellers are too competitive regardless of buyer values. ► Negatively correlated values lead to low prices regardless of market structure. ► Sellers are less responsive to rivals when buyer values are negatively correlated.