Four Essays on Experimental Economics

Journal of Industrial Economics, 2007

We present results from 50-round market experiments in which firms decide repeatedly both on price and quantity of a completely perishable good. Each firm has capacity to serve the whole market. The stage game does not have an equilibrium in pure strategies. We run experiments for markets with two and three identical firms. Firms tend to cooperate to avoid fights, but when they fight bankruptcies are rather frequent. On average, pricing behavior is closer to that for pure quantity than for pure price competition and price and efficiency levels are higher for two than for three firms. Consumer surplus increases with the number of firms, but unsold production leads to higher efficiency losses with more firms. Over time prices tend to the highest possible one for markets both with two and three firms.

This paper considers a duopoly price-choice game in which the unique Nash equilibrium is the Bertrand outcome. Price competition, however, is imperfect in the sense that the market share of the high-price firm is not zero. Economic intuition suggests that price levels should be positively related to the market share of the high-price firm. Although this relationship is not predicted by standard game theory, it is implied by a generalization of the Nash equilibrium that results when players make noisy (logit) best responses to expected payoff differences. This logit equilibrium model was used to design a laboratory experiment with treatments that correspond to changing the market share of the high-price firm. The model predicts the final-period price averages for both treatments with remarkable accuracy. Moreover computer simulations of a naive learning model were used, ex ante, to predict the observed differences in the time paths of average prices.

2003

In this paper we report the results from a series of experiments on Cournot (homogeneous and differentiated products) and Bertrand (differentiated products) duopoly markets with no uncertainty, fixed endpoints and random matching. For each set, the experiments are designed with three alternative information set up: I) no information (participants are only informed on their own payoff for the period), 2) average industrial profit (participants are informed on their own performance, as well as on the average profit in all markets), 3) imitation (players are informed, on request, on their rivals' past successful actions). The effect of different information structures on individual behaviour in market experiments is a long debated issue. Recently, using evolutionary arguments, it has been argued that the imitation of successful strategies induces more competitive equilibria in market games . By the same token, the information on the industry's average profitability might induce more collusive outcomes, if such markets signals are perceived by players as aspiration levels and if they therefore try new strategies anytime their profits fall below such threshold (F. . Our aim is to test such predictions in duopoly price and quantity games. We find that the imitation learning rule prevails when players have full information on their rivals' previous choices, and such learning behaviour induces more competitive outcomes in the Cournot market designs. As for the aspiration learning rule, the evidence is unclear. Whilst in the majority of the cases, players experiment new strategies when their payoff falls below the average profit, as predicted by the aspiration rule, we find no evidence of convergence to collusion, though in the Cournot experiments, the fraction of players choosing cooperative actions in the last stages of the game significantly increase in the second information setting.

We define and examine the performance of three minimal strategic market games (sell-all, buy-sell, and double auction) in laboratory relative to the predictions of theory. Unlike open or partial equilibrium settings of most other experiments, these closed exchange economies have limited amounts of cash to facilitate transactions, and include feedback. General equilibrium theory, since it abstracts away from market mechanisms and has no role for money or credit, makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms. Introduction of markets and money as carriers of process creates the possibility of motion. The laboratory data reveal different paths, and different levels of allocative efficiency in the three settings. The results suggest that abstracting away from all institutional details does not help understand dynamic aspects of market behavior. For example, the oligopoly effect of feedback from buying an endowed good is missed. Inclusion of mechanism differences into theory may enhance our understanding of important aspects of markets and money and help link conventional equilibrium analysis with dynamics.

Journal of Public Economic Theory, 2021

There is robust evidence in the experimental economics literature showing that monopoly power is affected by trading institutions. In this paper we study whether trading institutions themselves can shape agents' market behaviour through the formation of anchors and reference points. We recreate experimentally five different double-auction market structures (perfect competition, perfect competition with quotas, cartel on price, cartel on price with quotas, and monopoly) in a within-subject design, varying the order of markets implementation. We investigate whether monopoly power endures the formation of reference prices emerged in previously implemented market structures. Results from our classroom experiments suggest that double-auction trading institutions succeed in preventing monopolists to exploit their market power. Furthermore, the formation of reference points in previously implemented markets negatively impacts on monopolists' power in later market structures.

Frontiers in Economics, 2002

Wheatsheaf under the title A Primer in Game Theory.

1998

2018

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".