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Risk dominance selects the leader. An experimental analysis
Cabrales, Antonio; Garcia Fontes, Walter; Motta, Massimo
Universitat Pompeu Fabra. Departament d'Economia i Empresa
Coordination games arise very often in studies of industrial organization and international trade. This type of games has multiple strict equilibria, and therefore the identification of testable predictions isvery difficult. We study a vertical product differentiation model with two asymmetric players choosing first qualities and then prices. This game has two equilibria for some parameter values. However, we apply the risk dominance criterion suggested by Harsanyi and Selten and show that it always selects the equilibrium where the leader is the firm having some initial advantage. We then perform an experimental analysis totest whether the risk dominance prediction is supported by the behaviour oflaboratory agents. We show that the probability that the risk dominance prediction is right depends crucially on the degree of asymmetry of the game. The stronger the asymmetries the higher the predictive power of the risk dominance criterion.
2005-09-15
Behavioral and Experimental Economics
risk dominance
equilibrium selection
leadership games
experimental economics
leex
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