Experimental Duopoly Markets with Demand Inertia

Abstract

This experimental study examines both spontaneous and strategically planned behavior of boundedly rational subjects in a dynamic duopoly situation. Spontaneous behavior is observed in game-playing experiments where students from the University of Bonn have played the dynamic duopoly game by direct interaction via computer terminals. Strategically planned behavior isrevealed in strategies developed by forty-five academic economists from 12 countries. These strategies are played against each other in computer simulations. The most striking observation in both types of examination is the coexistence of cooperation and competition. Short-run monopoly pricing emerges as the prevailing mode of cooperation in the planned strategies. However, the most successful strategies turn out to be moderately competitive. An evolutionary tournament suggests a long-run coexistence of competition and cooperation.