An Experimental Disposition of Alternative Bilateral Monopoly Models Under Conditions of Price Leadership

Abstract

A controlled laboratory experiment was conducted to test human decision processes in an economic context. The economic model was bilateral monopoly, where one buyer is confronted by one seller. We employed the price leadership version, where one participant has an advantage over his adversary. The equilibrium solution (developed by Cournot and, later, by Bowley) for this situation is not Pareto optimal. This prediction is at variance with the observed central tendency of contracts negotiated under equal strength bilateral monopoly, so an established alternative hypothesis is available. The results, in general, support the Cournot-Bowley equilibrium solution. However, it is possible to shift the central tendency of contracts to the mid point of the Paretian optima by appropriate experimental controls.

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