An Experimental Test of Tradeoffs between Discount Rates and Number of Firms in Supporting Collusion

Abstract

One prediction of oligopoly theory is that there should be a tradeoff between discount rates (rates of time preference) and the number of competitors in a market, in supporting the possibility of collusive equilibria. Here we conduct a series of laboratory experiments with markets of 2, 3, and 4 firms, and discount rates explicitly accounted for, and examine whether the tradeoffs predicted in theory occur in the behavior of our subjects. We find that an increased number of firms in a market is associated with larger market output (and lower prices), reflecting the generalized Cournot result throughout. We fail to observe an impact of higher discount rates in further limiting collusive behavior.