Signalling and Adaptive Learning in an Entry Limit Pricing Game

In an experimental investigation of Milgrom and Roberts' (1992) model, play consistently converges to a unique equilibrium, providing evidence of sophisticated strategic behavior that the theory predicts. Play starts with monopolists at their myopic maxima, followed by an attempt to pool, and then (if no pooling equilibrium exists) separation, suggesting myopia rather than a forward-looking process. When both pure-strategy equilibria and separating equilibria exist, equilibrium selection is a function of the past history of play. An adaptive learning model characterizes the major features of the data and provides predictions of intermediate-term behavior that is otherwise lacking in the theory.