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4 - Price ceilings as focal points? An experimental test

Published online by Cambridge University Press:  04 December 2009

By
Dirk Engelmann  and
Hans-Theo Normann
Edited by
Jeroen Hinloopen
Afterword by
Hans-Theo Normann
Jeroen Hinloopen
Affiliation:
Universiteit van Amsterdam
Hans-Theo Normann
Affiliation:
Royal Holloway, University of London
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Summary

In this experiment, we analyze whether price ceilings can have a collusive effect in laboratory markets. Our main interest is the focal-point hypothesis which says that a price ceiling may facilitate tacit collusion and lead to higher prices because it resolves a coordination problem inherent to collusion. Our results reject the focal-point hypothesis. Markets with price ceilings have lower prices than markets with unconstrained pricing. The static Nash equilibrium predicts the data accurately.

Introduction

Price ceilings are a common instrument of competition policy. They have been used at least since ancient Greek times and are known from today's markets as diverse as food, steel, rents, fees for physicians, interest rates and electricity spot market prices.

The prevalence of price ceilings and the temptation for policy makers to impose them is easily explained. One can go as far back as Roman Emperor Diocletian (The Edict on Prices, AD 301) to find

In response to the needs of mankind itself, we have decided that maximum prices of articles for sale must be established. We have not set down fixed prices since many provinces occasionally enjoy the fortune of welcome low prices. [E]very person shall take note that the liberty to exceed them [maximum prices] has ended, but that the blessing of low prices has in no way been impaired.

In short, this policy prevents prices from getting higher than the ceiling but does not harm competition possibly pushing them below the ceiling.

Type
Chapter
Information
Experiments and Competition Policy , pp. 61 - 80
Publisher: Cambridge University Press
Print publication year: 2009

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References

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