How much you talk matters: Cheap talk and collusion in a Bertrand oligopoly game

Abstract

This study investigates the impact of cheap talk on price in a repeated Bertrand oligopoly experiment. Participants are placed in three-person bidding groups where the lowest bid wins. During the first 10 rounds, participants are not allowed to communicate with each other. All three-person groups show decreasing market prices in the first 10 rounds. We then play another 20 rounds where participants can text with one another using an instant message system. Some groups were allowed to text before every round, some to text before every other round, some to text every third round, some to text every fourth round, and some to text only every fifth round. When texting is allowed, All groups attempt to collude to raise the price after being allowed to text. Whether they are successful depends on the combination of how often they can text and whether all three participants actually text.