Can market competition reduce anomalous behaviours

European Economic Review, 2021

We use an experiment to study whether market selection can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under carefully designed incentives, market competition can indeed reduce anomalous behaviour in games.

This paper investigates the conventional wisdom that markets would naturally allocate the rights for performing decisional task to those players who might be best suited to perform the task. We embedded the decisional tasks in a stylised setting of a game, motivated by Littlewood (1953) Red Hat Puzzle, when the optimal choices in the game require players to employ logical and epistemological reasoning. We present a treatment where players are permitted to trade their participation rights to the game. The payoffs are furthermore calibrated such that the players who know the optimal choice in the game should value the rights strictly more than those who do not. However, aggregated performances in this treatment were found to be significantly lower than the control treatments where players were not permitted to trade their participation rights, providing little support for the conventional wisdom. We show that this finding could be attributed to price "bubbles" in the markets for participations rights.

Economics of Governance, 2014

This paper reports a series of laboratory experiments intended to identify conditions that attenuate the overdissipation of rents typical of experimental contest games. We examine the influences on contestant behavior of the observability and timing of preceding bids, allocation rules for the situation when no bids occur (random prize allocation vs. prize loss) and matching protocol for repeated contests involving pairs of bidders. Our results show that the simultaneous presence of three factors (simultaneous bids, random prize allocation if no bids occur and fixed matching) allows contestants to coordinate to realize efficient outcomes (underbidding). However, the absence of one of these factors causes overbidding to return. From the perspective of theoretical prediction, the decision to allocate the prize even when no bids occur (no fight, no loss) should be irrelevant. However, this allocation decision may strongly influence behaviour (by encouraging submission of efficient and minimal bids) if combined with features that encourage collusion (fixed matching and symmetry). Keywords Rent seeking • Conflict • Experiments • Prize allocation rule JEL Classification C90 • D72 The authors would like to thank editor Amihai Glazer and two anonymous referees for comments and suggestions that helped us to substantially improve the paper. The authors gratefully acknowledge financial support from the Spanish Ministry of Economy and Competitiveness through Project ECO2011-26996, and from the Regional Government of Andalusia through Projects SEJ2009-4794 and SEJ2011-8065.

2016

This paper investigates the conventional wisdom that market competition for the rights to perform decision-making tasks improves aggregate performances in all relevant tasks by diverting decision rights to individuals who are better able to utilise them. To do so, I use an experiment that embeds asset markets into the Hat Puzzle Problem game. I show that players’ performances in the game will depend on their ability to employ sophisticated counterfactual reasoning and provide a behavioural framework that illustrates how market competition can improve aggregate performances in the game. Contradictory to the conventional wisdom, I find that market competition exacerbates aggregate performances and diverts decision rights to players who are less able to utilise them. I provide some evidence that the failure of markets can be linked to the formation of price “bubbles”, which distort the markets’ allocation of decision rights.

Decision Sciences, 1978

An experimental duopoly game was used to test the effects of market structure, opponent behavior, and information about opponent behavior in the game. Rational behavior would be responsive only to market structure. Problem-solving behavior would be responsive to all three factors. Results showed that decision behavior was responsive to all three factors in interaction as well as reponsive to interactive effects of time.

Games and Economic Behavior, 2002

We investigate behavior in two unprofitable games-where Maxmin strategies do not form a Nash equilibrium yet guarantee the same payoff as Nash equilibrium strategies-that vary in the riskiness of the Nash strategy. We find that arguments for the implausibility of Nash equilibrium are confirmed by our experiments; however, claims that this will lead to Maxmin play are not. Neither solution concept accounts for more than 53% of choices in either game. The results indicate that the tension between the Nash and Maxmin strategies does not resolve itself over the course of the experiment. Moreover, the relative performance of the solution concepts is sensitive to the riskiness of the Nash strategy. Journal of Economic Literature Classification Numbers: C72, C92.  2002 Elsevier Science (USA)

2011

The danger of collusion presents a serious challenge for auctioneers. In this paper, we compare the collusive properties of two standard auctions, the English auction and the …rst-price sealed-bid auction, and a lesser-known format, the Amsterdam (secondprice) auction. In the Amsterdam auction, the highest losing bidder earns a premium for stirring up the price. We study two settings: in one, all bidders can collude, and in another, only a subset is eligible. The experiments show that the Amsterdam auction triggers less collusion than the standard auctions. We compare experimental results to theoretical predictions, and provide an explanation where they di¤er.

Economic Inquiry, 2009

The paper studies bidder behavior in simultaneous, continuous, ascending price auctions. We design and implement special conditions, a type of "collusion incubator" environment, within which tacit collusion develops quickly, naturally and reliably. The collusion incubator environment is designed as a methodological tool that permits observation of phenomenon that has difficulty surviving in other environments, study models of its development, and then study institutional and environmental remedies that would cause it to evolve into competitive behavior. The special, collusion incubator environments are based on a type of public, symmetrically "folded" preferences together with what we call "item-aligned" preferences. The research design called for exploratory, experimental probes of possible institutional or procedural "remedies" that might destroy the tacit collusion and promote competitive behavior should tacit collusion take place. The results are as follow. (1) The collusion incubator environmental conditions do foster tacit collusion. (2) The tacit collusion corresponds to the unique buyer Pareto Equilibrium of a game theoretic model of the auction process. (3) Once tacit collusion developed, it proved remarkably robust to institutional changes that weakened it as an equilibrium of the game theoretic model. (4) The only remedy that was clearly successful was a non-public change in the preference of participants that destroyed the symmetrically, "folded" and "item aligned" patterns of preferences, creating head to head competition between two agents reminiscent of the concept of a "maverick".

We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1972). Market games obtain Pareto inferior (strict) Nash equilibria, in which some markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient Nash equilibria in which all markets are open. As the number of subjects participating in the market game increases, the Nash equilibria they achieve approximates the associated Walrasian equilibrium of the underlying economy. Motivated by these findings, we investigate theoretically whether evolutionary forces lead to Walrasian outcomes in such games. We introduce a strong version of evolutionary stable strategies (SESS) for finite populations. Our concept requires stability against deviations by coalitions of agents. A small coalition of trading agents is sufficient for Pareto improving trade to be generated. In addition, provided that agents lack market power, Nash equilibria corresponding to approximate competitive outcomes constitute the only approximate SESS.

SSRN Electronic Journal, 2001

The most important issues in auction design are the traditional concerns of competition policy-preventing collusive, predatory, and entry-deterring behaviour. Ascending and uniform-price auctions are particularly vulnerable to these problems, and the Anglo-Dutch auction-a hybrid of the sealed-bid and ascending auctions-may often perform better. Effective antitrust policy is also critical. However, everything depends on the details of the context; the circumstances of the recent U.K. mobile-phone license auction made an ascending format ideal, but this author (and others) correctly predicted the same format would fail in the Netherlands and elsewhere. Auction design is not "one size Þts all". We also discuss the 3G spectrum auctions in Germany, Italy, Austria and Switzerland, and football TV-rights, TV franchise and other radiospectrum auctions, electricity markets, and takeover battles. 2 c°Paul Klemperer, 2001 JEL Nos D44 (Auctions) L41 (Antitrust) L96 (Telecommunications) 1 This is a revised and extended version of the paper previously circulated under the title "What Really Matters in Auction Design". 2 Disclaimer : I was the principal auction theorist advising the U.K. government's Radiocommunications Agency, which designed and ran the recent U.K. mobile-phone license auction. Ken Binmore had a leading role and supervised experiments testing the proposed designs. Other academic advisors included Tilman Borgers, Jeremy Bulow, Philippe Jehiel, and Joe Swierzbinski. The views expressed in this paper are mine alone. Although some observers thought some of the behaviour described below warranted further investigation, I do not intend to suggest that any of it is improper or violates any applicable rules or laws.