Experimental Design
We base the market environment on the following parametrization of the Bertrand competition. Two symmetric firms, i={1, 2}, play the stage game repeatedly. In each period, they compete by simultaneously setting prices (in 25-cent increments) in the range from 0 to 9. Each firm i has the same cost function C(q_{i}) = [(0 if q_{i} = 0) and (25 + q_{i} if q_{i} > 0)] (thus, the cost function has avoidable fixed costs, and decreasing average costs for positive output). The demand function is given by D(p) = 17 - p.
If firm i sets the lower price, it serves the whole market and makes a profit of pi_{i}(p_{i}, p_{-i})=p_{i} D(p_{i}) - C(D(p_{i})) while the other firm, -i, receives nothing: pi_{-i}(p_{i}, p_{-i})=0. If the two firms set the same price, the resulting duopoly profits differ between the two treatments. In SYM, both firms share the market demand equally if they set the same price. In WTA, both firms have an equal chance of receiving either nothing or serving the entire market (this is determined by a random draw).
At the beginning of the experiment, each subject is randomly and anonymously matched with another subject and interacts with this subject for the entire experiment. The experiment lasts 40 periods, and this and all other design features of their treatment are known to the subjects.
We frame the experiment as price competition, but instead of informing subjects about all details of the underlying model, we explain the experimental game using payoff tables (which was also done in the experiments of some other papers). Our payoff tables show the profit consequences (in euros) for all allowed prices and depending on the decision of the other firm. These tables are part of the experimental instructions and can also be used by the subjects when taking their decisions. Subjects are told that negative numbers stand for losses. To cover these possible losses, subjects start the experiment with an initial endowment of 1.50 euros. After reading the instructions on-screen, subjects have to correctly answer a set of control questions to proceed (and this is known to all subjects, too).
When entering their decision on the computer, subjects will be shown a slider on-screen. Subjects choose a price using the slider and are shown, below the slider, the profit consequences before submitting the chosen price (and this information is updated in real-time when sliding to a different price). After confirming their decision, subjects receive feedback: their price, the other firm's price, and their period profit and total profit so far. At the end of the experiment, we sum up all periods' profits (and losses) and the initial endowment. If subjects incur overall losses at the end of the experiment, their payoff is capped at zero euros.
After the main part of the experiment, we conduct a questionnaire. We ask for the subjects' gender (male/female/non-binary), elicit their cognitive abilities by asking for their final math grade in school (on a range from 1 to 5, best to worst grades in the German system), ask if they study a field with compulsory economics courses, and ask if subjects have experience with game theory (again, to introduce a game theory-dummy). We also conduct a simple, monetarily incentivized task to elicit the subjects' risk aversion: each subject is endowed with one euro and decides about the amount (in 10-cent increments) to invest in a risky asset---with 50% probability the investment is lost, with 50% probability the investment is paid out 2.5-fold.
We invite subjects using a pre-existing database (based on ORSEE). These subjects are exclusively students from various fields of study from the University of Potsdam and other nearby universities. Every subject takes part in one session only. Upon arrival at the laboratory, all subjects are seated at computer workstations with privacy walls. Communication between subjects is prohibited. After the experiment, we pay all subjects in cash and in private. On top of the payoff of the incentivized part of the experiment, subjects receive a show-up fee of five euros (and this show-up fee is not offset against potential losses from the main part of the experiment).