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Erik Wengström
 
''Price competition, level-k theory and communication''
( 2008, Vol. 3 No.66 )
 
 
This paper analyzes communication in a price competition game using the level-$k$ theory of bounded rationality. The level-k analysis predicts prices to be higher with communication than without. Our experimental evidence lends support to the view that communication affects subjects in a way that is compatible with the level-k model, indicating that people lie in order to fool other players that they believe do less thinking. Moreover, the results indicate that the predictive power of the level-k model does crucially depend on the possibility for high level players to form homogenous beliefs about the behavior of the level-0 players.
 
 
Keywords: Noncooperative Game Theory Communication Bounded Rationality Experiments
JEL: C7 - Game Theory and Bargaining Theory:General
C9 - Design of Experiments: General
 
Manuscript Received : Sep 23 2008 Manuscript Accepted : Oct 17 2008

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