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| Erik Wengström |
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| ''Price competition, level-k theory and communication'' |
| ( 2008, Vol. 3 No.66 ) |
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| 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. |
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| Keywords: Noncooperative Game Theory Communication Bounded Rationality Experiments |
JEL:
C9 - Design of Experiments: General |
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| Manuscript Received : Sep 23 2008 | | Manuscript Accepted : Oct 17 2008 |
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