Reciprocity and Learning in Price Competition

One disputed topic in entrepreneurship and management is how cooperation and strategic advantages emerge and are maintained in industries where firms share similar technological opportunities and structures. This topic is particularly important to analyse online and digital markets, which can be regarded as networks where entrepreneurs share information and where there are no structural differences among the firms. In this paper, we show that market power and tacit collusion may be the outcome of repeated interaction among agents\entrepreneurs driven by two competing factors, information and reciprocity. Our hypotheses are tested through a laboratory experiment on a sequential pricing game, examining the influence of varying levels of information on agents’ pricing behaviour. We consider duopoly markets, where agents interact over ten periods, and examine three levels of information (i.e. three treatments): no information on rivals’ prices; information limited to the direct opponent; full information also on agents’ strategies in unconnected markets. The results show significant variations across treatments. Specifically, when information on prices on all markets is provided, prices and profits are very close to the sub-game equilibrium level. Overall, we show that the interaction between reciprocity and the emulation of more successful agents drives the move towards higher profits and less competitive markets.