This is a laboratory experiment, conducted in a standard university experimental economics lab, recruiting students broadly across the university. Subjects will be randomly assigned to a treatment, which is fixed throughout their experimental session. They will be randomly assigned to duopoly pairs to make investment and price choices. All subjects will be sellers, and demand for the differentiated products is computerized.
Each session will include 10 supergames, with random and anonymous re-pairing of sellers between supergames. Each supergame is repeated for an indefinite number of rounds, with a continuation probability of 7/8 each round. The experiment employs block random termination (4-round blocks). Prior to each set of 4 rounds, sellers will decide whether to make an investment decision, which affects their costs and the demand they face for these rounds. Investment only succeeds with 4/5 probability.
The combination of successful investments determines the payoff matrix for the pricing subgame that applies for the subsequent 4 rounds. Sellers chose simultaneously each round from a set of 8 possible prices. They receive feedback at the end of each round regarding the other seller’s investment and price choice, as well as their own earnings for the round. At the end of their session, subjects are paid for all rounds conducted prior to the supergames’ random termination.