The Discrete Charm of Nominal Illusion

We investigate the emergence and persistence of nominal illusion in an experimental entry game where firms must choose which local market to enter, then compete in prices. All local markets are equivalent in real terms and they only differ in the currency the price competition is run under. Our experimental results show a positive, persistent and monotone effect of the nominal exchange rate on (real) posted prices. We provide an explanation in terms of players simplifying the choice set using discrete grids.

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