Price competition, level-k theory and communication

Erik Roland Wengström

Price competition, level-k theory and communication

Erik Roland Wengström

Department of Economics

1 Citation (Scopus)

207 Downloads (Pure)

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

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Wengström, E. R. (2008). Price competition, level-k theory and communication. Economics Bulletin, 3(66). http://economicsbulletin.vanderbilt.edu/DisplayList.asp?Type=ByVolume&Code=1&Value=C

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AB - 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.

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Price competition, level-k theory and communication

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