Bertrand Competition with Asymmetric Marginal Costs

This paper tests the prediction of three discrete asymmetric duopoly price competition games in the laboratory. The games differ from each other in terms of the size of the cost asymmetry that induces a systematic variation in the difference between the firms’ marginal costs. While the standard theory requires the low-cost firm to set a price just equal to the high cost firm\u27s marginal cost, which is identical across all three games, and win the entire market; intuition suggests that market price may increase with a decrease in the absolute difference between the two marginal costs. We develop a quantal response equilibrium model to test our competing conjecture