Location Experiments With Communication
working paper E00-03
Department of Economics
Previous experimental research designed to test location games yield results that differ from the predictions of theory. In a simple setup with 4-6 firms choosing locations on a unit line, subjects fail to reach the pure-strategy Nash equilibrium. One possible reason for the failure of theory is that subjects are unable to solve the attendant coordination problem. In the simultaneous-play environment there is no mechanism for them to decide which player will take each location specified in the equilibrium strategy set.
In this paper I introduce one-way communication in order to facilitate the solution of the coordination problem. This design has the potential to yield a cleaner test of the theory by removing the confounding coordination difficulty. I run groups of two to four firms in a fixed-matching repeated game. In these experiments, one subject in each group is designated to be the communicator. Prior to each round of play, the communicator sends a suggested location set to the other players. If the communicator understands the strategic situation, he can specify locations to the other players that result in an equilibrium outcome. Previous experiments suggest that this kind of “cheap talk” can facilitate equilibrium selection in coordination games. The results show some improvement in the ability of subjects to coordinate on Nash equilibrium play. However, there is considerable heterogeneity across groups. I conclude that one-way communication enhances the ability of subjects to coordinate, but that bounded rationality and poor leadership preclude the convergence to equilibrium.
Coming soon: datasets from this paper: 2-seller groups | 3-seller groups | 4-seller groups