Sharing rules in Bertrand duopolies with increasing returns

Abstract

Despite their empirical relevance, increasing returns to scale are understudied in experimental markets. We use Bertrand duopolies with increasing returns to examine the effects of two sharing rules on collusive behavior and prices in a pre-registered experiment: the symmetric rule (where each of the two firms that set the same price serves half of the market demand) and the winner-takes-all rule (where a fair randomization device decides which of the two firms serves the entire market). We hypothesized that market prices would be higher under the winner-takes-all rule because it provides a collusion mechanism that the symmetric rule does not. While we find that subjects under the winner-takes-all rule coordinate more often on one price than the symmetric sharing rule, this does not increase market prices. Coordination on high prices is rare. Additionally, the winner-takes-all rule facilitates the subjects’ ability to coordinate on equal prices after sharing a market in the previous period.