AN EXPERIMENTAL TEST OF DISCOUNT-RATE EFFECTS ON COLLUSIVE BEHAVIOR IN DUOPOLY MARKETS

Game theory suggests that the ability to sustain collusive equilibria in duopoly markets depends on sufficiently low rates of time preference. This proposition has never been subjected to experimental test, possibly because of the difficulty of inducing collusive behavior in experimental markets in the absence of discounting. We attempt to induce collusive equilibria in the absence of discounting. We then introduce discount rates of 25 and 150 percent by having payoffs decline each period at one of these two rates. The experimental results indicate that collusive duopoly equilibria are less likely to occur with higher rates of discounting.