Firm Behavior In Oligopolistic Markets: Evidence From A Business Simulation Game

Abstract

Oligopolistic markets are known to be associated with a high degree of price and output rigidity. This is due to mutual interdependencies among firms in the market with regard to price and production. The primary objective of this research is to use a business simulation game to observe the convergence in pricing that is part and parcel of the gamesmanship that occurs in an oligopoly market. A second objective of this research is to observe how a firms investments influence future productive potential. A third objective is to explore whether firm behavior changes after the other firms ex post decisions are revealed after the first four quarters of the simulation. Both descriptive statistics and regression analysis were used. Given the longitudinal nature of the data, random-effects specifications in all regressions were employed. Evidence of price rigidity was observed, especially within the first four periods when firms are not able to observe the other firms choices. Furthermore, investments in marketing and robotics appear to positively impact production.

Confirming theory and previous literature, oligopolistic firms need to contend with the jockeying for position and the concomitant stickiness in prices. Therefore, it is of critical importance for firms to formulate appropriate strategies in order to succeed in an oligopoly setting.