Price Competition Between Teams

Gary Bornstein & Uri Gneezy

Economic agents (e.g., firms, corporations) are often treated as unitary players. The internal organization of these agents and, in particular, the possibility of conflicting interests within agents, is overlooked. The present study uses an experimental approach to examine whether market performance is sensitive to the violation of the unitary player assumption. Toward this goal, we modeled a duopolistic market as a team game involving two teams with three members in each team. Each player simultaneously demanded a price and the team whose total demand was lower won the competition and was paid its price. The losing team was paid nothing. In case of a tie, each team was paid half its price. This composite duopoly was studied under two conditions; one in which the team's profit was divided equally amongst its members (and, hence, each team could be considered a unitary player) and another in which each individual member was paid her own price. Based on the reinforcement learning principle as modeled by Roth and Erev (1995), we predicted that convergence to the competitive price would be much faster in the former treatment than in the latter. The experimental results strongly confirmed this prediction.

September, 1998
Published in: 
Experimental Economics 5 (2002), 29-38.