Burgundy School of Business

Experimental
Economics
Literature Review - Oligopoly experimentation of learning with simulated markets -
Aurora Garcõ Âa Gallego
Table of Contents
1 Objective of the experiment.........................................................................................................1

2 Previous results in the field..........................................................................................................1

3 Theory...........................................................................................................................................1

4 Experimental design.....................................................................................................................2

5 Results and conclusion..................................................................................................................2

6 Potential improvements/ alternative treatment.........................................................................3

7 More recent publications..............................................................................................................4

Oligopoly experimentation of learning with simulated markets
Aurora Garcõ Âa Gallego

1 Objective of the experiment

In this experiment, the aim was to determine whether economic agent act with
rationality and how the environment they evolve in influence their choices.
Interest has been put into access to information and how firms can come to an information
equilibrium on a common market. Also, to study the learning process followed by a
businessman. This is tested on how a set of firms will adjust their price in the same
“market”.

2 Previous results in the field

Previous results in the field show how the harmony of interest is not easy in an
oligopoly. First, it has been determined that firms made decisions following precise rules
(Cyert and DeGroot 1971, 1973; Kirman 1975; Gates et al 1977, 1978), this was not correct.
Later assumptions (Robson, 1986) shows that firms made decisions regarding their
competitors. But the economic environment is uncertain and access to information is not
equal amongst agents.
Two solutions have been determined: the Bertrand-Nash equilibrium and tacitly
cooperative solution.
Bertrand-Nash equilibrium is the “non-cooperative” solutions, firms act for their sole
interest.
In the tacitly cooperative solution or “joint-monopoly” solution, firms “cooperate” to
maximize the total profit of the industry.

3 Theory

The theory is that it cannot be a perfect oligopoly with no information equilibrium.

There might be a “limit point” to the market where firms tend to converge to create an
oligopoly.

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4 Experimental design

Number of subjects: Five subjects are tested here

Treatments: Each player plays anonymously and sits separately; their choices are
independent.
Periods: The experience is repeated over an infinite number of T periods.
Timing: each player got 1.5min at each period to make their choice at the same time.
Subject information: players are given this information: “there are n firms, you are one of
them, cost of productions equal to 40 units, you have 1.5min to make up your price, if you
do not make a choice it is set up to the previous period’s one.” Players at some turns are
offered figures and graph as additional information as well as prices fixed by firms in the
past and demand estimations.
Payment rule: Monetary reward is a function of the firms’ profit over T periods.

5 Results and conclusion

Convergence
With perfect access to information, firms tend to cooperate less, we came to a
Bertrand-Nash equilibrium.
Learning adjustment
Adaptive learning
Agent acquires experience over time, the more the game is repeated. They adjust
their price over their competitors one the past turns. They adapt their beliefs and
model of choices to gain more profits.
Least square learning
Firms base their choices over estimations regarding information they have or past
information. They look for “hints” to make their choice.
Price
Price is the only strategic variable when given not enough information.

Players are more attracted by the non-cooperative solutions in the long run, the
Bertrand- Nash equilibrium even if trying to cooperate at early periods.
Agents’ strategies are very adaptable regarding competitors’ decisions.

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6 Potential improvements/ alternative treatment

We concluded here that agents are most likely non-cooperative. It is to be taken

with precaution, as it might come from different factors other than those set up by the
experiment. We must not forget that any experiment got his limits, by the only fact it is an
experiment, subjects are monitored, given instruction, and as for surveys and
questionnaires, answers and behaviour of a certain subject may not reflect real life. The
trial-and-error process especially has a limited place in the real-life market situation, the
firm’s manager doesn’t have that opportunity.
Another thing we observed in real life are “cartel”, a form of oligopoly where firms
are in close contact, here a limitation to the experiment might be that each player are
anonymous and play independently, even if not legal we know that it does not work like
that in real life. An additional variable could be to give participants the possibility to
exchange directly, to observe if such “cartel” situation can occur.
About limitation, the past experiment seems to put all firms on an equal footing,
however, we know that not all company have the same power, it could be interesting to
implement the different level of “power” over the participants to see how it can influence
over the oligopoly, whether if different “powers” level come to a balance.
Also, in real life full access to information is not given, it can be difficult or costly for
firms. Developing systems to limit access to information in experiments is another way to
improve the results. Asymmetrical access to information is a variable to consider.
Markets are controlled by more and more authorities to avoid points expressed
before, they raise awareness over oligopolistic markets that can lead to cartels, that
authoritarian form is another unexploited variable in experiments.
A lot of other factors are to be considered, some of them could be cost asymmetries
between firms, therefore inequality of earnings, factors that made companies less likely to
cooperate.

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7 More recent publications

Testing Oligopoly Theory in the Lab by Nikolaos Georgantzis, 2006 assessed oligopoly
theory to a broader level, questioning past results and bringing new thoughts on the
subject.
Information and Learning in Oligopoly: An Experiment by Maria Bigoni, 2013 tried to
assess the access to information when concealed and strict
Endogenous information disclosure in experimental oligopolies by Dávid Kopányi and
Anita Kopányi-Peuker, 2015 tried to assess further information sharing and to what
extend it influence decisions.

Oligopoly is obviously a subject that deserves more experimentation. Recent articles are
scarce and although some points to the potential of improvements for better results,
we do not find the corresponding experiments with these new treatments.

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