Abstract
This paper analyzes communication in a price competition game using the level-$k$ theory of bounded rationality. The level-k analysis predicts prices to be higher with communication than without. Our experimental evidence lends support to the view that communication affects subjects in a way that is compatible with the level-k model, indicating that people lie in order to fool other players that they believe do less thinking. Moreover, the results indicate that the predictive power of the level-k model does crucially depend on the possibility for high level players to form homogenous beliefs about the behavior of the level-0 players.
| Original language | English |
|---|---|
| Journal | Economics Bulletin |
| Volume | 3 |
| Issue number | 66 |
| Number of pages | 15 |
| ISSN | 1545-2921 |
| Publication status | Published - 2008 |