Bertrand Oligopoly And Factors Markets With Scarcity And Price Controls

Abstract

In an earlier article, we reported the results of a classroom experiment simulating price competition in an oligopoly with differentiated goods. That study raised some questions that we were unable to address at that time. For this current study, we have adapted the experiment to further explore the effects of scarcity in the input markets, and to study the effects of price controls in these markets. We find that scarcity in an input market has the expected directional effect on prices in both input and output markets, but not necessarily the magnitude expected; we further find that price controls have only some of the effects expected. In the current experiment, we increased the number of rounds of the game to allow more opportunity for convergence to a stable outcome, and to allow for three distinct phases of the game: initial rounds in which inputs were abundantly available, subsequent rounds in which one input’s supply was dramatically reduced, and final rounds in which a price floor was established on the one input which remained abundant. As expected, firms played Nash/Bertrand strategies in the early rounds. However, the shock caused by reducing the availability of capital took many rounds for full adjustment, with both output prices and the equilibrium rental rate of capital rising consistently and gradually toward their projected equilibria over ten rounds, although even then capital prices did not rise enough to absorb all firm profits. Surprisingly, establishing a minimum wage did not have the anticipated effect of balancing payments between labor and capital; instead, the minimum wage completely disrupted the trend of an increasing rental price of capital and reduced it to zero, while creating volatility in profits without consistently eliminating them. Overall, we find that most of our anticipated results ultimately obtain, but adjustments to variations in market conditions are neither immediate nor perfectly consistent with the predictions of theory.