Traditional theory demonstrates how firms can sustain high prices and profits through repeated game strategies but abstracts from the bounded rationality of human managers. Behavioral models posit that cognitive constraints lead to biased mental models, which underestimate competitor sophistication and thus result in overestimating the profitability of price cuts. We study a firm with over 20,000 gas stations where managers have significant discretion over fuel prices. Managers with lower cognitive skills tend to underestimate competitor sophistication in a lab-in-the-field beauty-contest game. Cognitive skills also explain divergent beliefs about optimal pricing: high-skill managers favor maintaining high prices at the market price ceiling, while low-skill managers prefer cutting prices. Turning to actual pricing, lower-skill managers set lower prices and engage more frequently in price wars, leading to reduced profits. Additional survey measures confirm the key underlying mechanism, showing that managers with low cognitive skills are less likely to think that price cuts trigger retaliatory price cuts by competitors. An implication is that cognitive constraints among firm managers may increase consumer surplus and market efficiency in markets with market power by inducing lower prices.