Tax liability side equivalence in an experimental posted offer market, Southern Economic Journal 68 (3), 2002, 672-682. (with Rainald Borck, Dirk Engelmann, and Hans-Theo Normann)
Abstract: In theory, the incidence of a tax should be independent of which side of the market it is levied on. This principle of liability side equivalence underlies virtually all theories of tax incidence. Policy discussions, however, tend to place great emphasis on the legal division of tax payments. We use computerized experimental posted-offer markets to test liability side equivalence. We find that market outcomes are essentially the same when the tax is levied on sellers as when it is levied on buyers. Thus we cannot reject liability side equivalence.
Big fish eat small fish: On merger in Stackelberg markets, Economics Letters 73 (2), 2001, 213-217. (with Steffen Huck and Kai A. Konrad)
Abstract: In this note we show that the profitability of merger in markets with quantity competition does not only depend on cost conditions but also on the market structure and on the involved firms' "strategic power.'' Our main result is that bilateral merger can be profitable even if costs are linear--but only in the case of a ``strong'' firm incorporating a ``weak'' firm which has adverse effects on welfare.
To commit or not to commit: Endogenous timing in experimental duopoly markets, Games and Economic Behavior 38, 240-264. (with Steffen Huck and Hans-Theo Normann)
Abstract: In this paper we experimentally investigate the extended game with action commitment of Hamilton and Slutsky (1990). In their duopoly game firms can choose their quantities in one of two periods before the market clears. If a firm commits to a quantity in period 1 it does not know whether the other firm also commits early. By waiting until period 2, a firm can observe the other firm's period-1 action. Hamilton and Slutsky predict the emergence of endogenous Stackelberg leadership. Our data, however, does not confirm the theory. While Stackelberg equilibria are extremely rare we often observe endogenous Cournot outcomes and sometimes collusive play. This is partly driven by the fact that endogenous Stackelberg followers learn to behave in a reciprocal fashion over time, i.e., they learn to reward cooperation and to punish exploitation.
Why firms should care for customers, Economics Letters 72, 2001, 47-52. (with Manfred Königstein)
Abstract: Adopting the indirect evolutionary approach, we show that it might be beneficial for firms on a heterogeneous market not only to care for their profits but also for their respective customers' welfare.
Stackelberg beats Cournot: On collusion and efficiency in experimental markets, Economic Journal 111 (474), 2001, 749-765. (with Steffen Huck and Hans-Theo Normann)
Abstract: We report on an experiment designed to compare Stackelberg and Cournot duopoly markets with quantity competition. We implement both a random matching and a fixed--pairs version for each market. Stackelberg markets yield, regardless of the matching scheme, higher outputs than Cournot markets and, thus, higher efficiency. For Cournot markets we replicate a pattern known from previous experiments. There is stable equilibrium play under random matching and partial collusion under fixed pairs. We also find for Stackelberg markets that competition becomes less intense when firms remain in pairs but we find considerable deviations from the subgame perfect equilibrium prediction which can be attributed to an aversion to disadvantageous inequality.
The East End, the West End, and King's Cross: On clustering in the four-player Hotelling game, Economic Inquiry 40 (2), 2002, 231-240. (with Steffen Huck and Nick Vriend)
Abstract: We study experimentally a standard four--player Hotelling game, with a uniform density of consumers and inelastic demand. The pure strategy Nash equilibrium configuration consists of two firms located at one quarter of the ``linear city'', and the other two at three quarters. We do not observe convergence to such an equilibrium. In our experimental data we find three clusters. Besides the direct proximity of the two equilibrium locations this concerns the focal mid--point. Moreover, we observe that whereas this mid-point appears to become more notable over time, other focal points fade away. We explain how these observations are related to best--response dynamics, and to the fact that the players rely on best--responses in particular when they are close to the equilibrium configuration.
The relevance of equal splits in ultimatum games, Games and Economic Behavior 37, 2001, 161-169. (with Werner Güth and Steffen Huck)
Abstract: In this note we present a slightly altered version of the mini ultimatum game of Bolton and Zwick (1995). More specifically, we replaced exactly equal splits by nearly equal splits either (slightly) favoring the proposer or the responder. Such a minor change should not matter if behavior was robust. We find, however, a significant change in behavior: Fair offers occur less often when equal splits are replaced by nearly equal splits.
Divisionalization in contests, Economics Letters 70 (1), 2001, 89-93. (with Steffen Huck and Kai A. Konrad)
Abstract: To be represented by more than one contestant in a contest has advantages and disadvantages. This paper determines the conditions under which it is favorable to send several agents into the contest.
Strategies, heuristics and attitudes towards risk in a dynamic decision problem, Journal of Economic Psychology 22 (4), 2001, 493-522.
Abstract: In this paper I consider a complex decision problem where subjects have to cope with a time horizon of uncertain duration and must update their termination probabilities which depend on stochastic events during "life''. First I describe how economic theory suggests to solve the decision problem. But since real decision makers can hardly be expected to behave according to the theoretical solution in the problem at hand, I describe several heuristics or rules of thumb and investigate their theoretical performance. Then observed behavior and the way how people tackled the problem is described. In the second part of the paper I discuss how much of the data can be explained by assuming that experimental subjects are risk averse.
An experimental analysis of intertemporal allocation behavior , Experimental Economics 3 (2), 2000, 137-152. (with Vital Anderhub, Werner Güth, and Martin Strobel)
Abstract: If the future is uncertain, optimal intertemporal decisions rely on anticipating one's own optimal future behavior as is typical in dynamic programming. Our aim is to detect experimentally stylized facts about intertemporal decision making in a rich stochastic environment. Compared to previous experimental studies our experimental design is more complex since the time horizon is uncertain and termination probabilities have to be updated. In particular the decision task is non-stationary as in real life which seriously complicates the task of diagnosing behavioral regularities. In this study we give some illustrative results and provide some general perspectives. Our main result is that subjects' reaction to information about termination probablilities are qualitatively correct.
The quality of the signal matters: A note on imperfect observability and the timing of moves, Journal of Economic Behavior and Organization 45 (1), 2001, 99-106.
Abstract: In a recent study Huck and Müller (in press) report that-in contrast to Bagwell's (1995) prediction---first movers in a simple experimental market do not lose their commitment power in the presence of noise. The present note shows that it is the quality of the signal and not the knowledge about the physical timing of moves that is responsible for these experimental results. Additionally, the findings reported here provide further evidence that the positional order protocol cannot induce non-equilibrium play.
Why the rich are nastier than the poor: A note on the distribution of wealth when individuals care for payoff differentials, Kyklos 53 (Fasc.2), 2000, 153-160. (with Steffen Huck)
Abstract: In view of empirical and evolutionary findings on the relevance of relative payoffs we study---as a benchmark case---a model in which individuals maximize payoff differentials having the opportunity to invest in their relative standing by harming others. Interestingly, optimal investments are increasing in individuals' own wealth and decreasing in the wealth of others.
Combining rational choice and evolutionary dynamics: The indirect evolutionary approach, Metroeconomica 51(3), 2000, 235-256. (with Manfred Königstein)
Abstract: In this study we propose a formal framework for the indirect evolutionary approach as initiated by Güth and Yaari (1992). It allows to endogenize preferences and to study their evolution. We define two-player indirect evolutionary games with observable types and show how to incorporate symmetric as well as asymmetric situations. We show how to apply solution concepts that are well known from game theory and evolutionary game theory to solve these games. For illustration we include two examples.
Perfect versus imperfect observability: An experimental test of Bagwell's result, Games and Economic Behavior 31 (2), 2000, 174-190. (with Steffen Huck)
Abstract: In a seminal paper Bagwell (1995) claims that the first mover advantage, i.e., the strategic benefit of committing oneself to an action before others can do, vanishes completely if this action is only imperfectly observed by second movers. In our paper we report on an experimental test of this prediction. We implement four versions of a game similar to an example given by Bagwell, each time varying the quality of the signal which informs the second mover. For experienced players we do not find empirical support for Bagwell's result.
On the emergence of attitudes towards risk: Some simulation results , in: Computational Techniques for Modelling Learning in Economics , ed. T. Brenner, Dordrecht: Kluwer 1999. (with Steffen Huck and Martin Strobel)
Abstract: By means of computer simulations we investigate the emergence of preferences towards risk in the context of 2-by-2 games. Preferences are learnt in the following sense: Based on current preferences individuals play an equilibrium of the underlying game. This determines monetary success and preferences yielding higher monetary success are more likely to be copied by individuals than others. We find that individuals learn to be risk averse though the degree of risk aversion which is developed varies with some parameters of the setup and may vary over time.
Attitudes toward risk: An experiment , Metroeconomica 54(1), 2003, 89-124. (with Jürgen Eichberger and Werner Güth)
Abstract: The evaluations of a repeated lottery with and without the option to sell the second-stage lottery are compared theoretically and experimentally. Comparing individuals' risk attitudes, we find that risk attitudes differ depending on the measure of risk-attitude applied. We also find that subjects show low or no risk-aversion, but put very high value on the opportunity to sell the lottery in the second stage of the decision problem. These findings cast doubts on the suitability of the random price mechanism for truthful revelation of willingness to pay in sequential decision problems.
Private information, risk aversion, and the evolution of market research (with Sandra Güth and Werner Güth)
Abstract: On a homogeneous oligopoly market informed sellers are fully aware of market demand whereas uninformed sellers only know the distribution. We first derive the market results for risk averse sellers and study then the evolution of market research driven by the difference in profits of informed and uninformed sellers. It is discussed how the evolutionarily stable number of informed sellers depends on market parameters.
Merger in contests Journal of Institutional and Theoretical Economics 158 (4), 2002, 563-575. (with Steffen Huck and Kai A. Konrad)
Abstract: Competition in some product markets is a contest. If some firms cooperate in these markets, they must decide how to allocate effort on each of their products and whether to reduce the number of their products in the competition. We show how this decision depends on the convexity properties of the contest success function, and we characterize the conditions for the respective type of cooperation to be profitable.
Profitable horizontal mergers without cost advantages: The role of internal organization, information, and market structure Economica, forthcoming (with Steffen Huck and Kai A. Konrad).
Abstract: Merged firms are typically rather complex organisations. Accordingly, merger has a more profound effect on the structure of a market than simply reducing the number of competitors. We show that this may render horizontal mergers profitable and welfare--improving even if costs are linear. The driving force behind these results, which help to reconcile theory with various empirical findings, is the assumption that information about output decisions flows more freely within a merged firm. This induces a commitment advantage for the merged firm.
On the Profitability of Collusion in Location Games Journal of Urban Economics 54, (2003), 499-510 (with Steffen Huck and Vicki Knoblauch)
Abstract: In this note we take a first step towards the analysis of collusion in markets with spatial competition, focusing on the case of pure location choices. We find that collusion can only be profitable if a coalition contains more than half of all players. This result holds for location games played in k-dimensional Euclidean space as long as consumers are distributed via atomless density functions. For competition on the unit interval, unit circle, and unit square we also derive sufficient conditions for collusion to be profitable.
Strategic Delegation in Experimental Markets, International Journal of Industrial Organization , forthcoming (with Steffen Huck and Hans-Theo Normann)
Abstract: In this experiment, we analyze strategic delegation in a Cournot duopoly. Owners can choose among two different contracts which determine their managers' salaries. One contract simply gives managers incentives to maximize firm profits, while the second contract gives an additional sales bonus. Although theory predicts the second contract to be chosen, it is only rarely chosen in the experimental markets. This behavior is rational given that managers do not play according to the subgame perfect equilibrium prediction when asymmetric contracts are given. Thus, delegation models' prediction that output and consumer rents are greater under the separation of ownership and management should be taken with care.
Absent-minded drivers in the lab: Testing Gilboa's model, International Game Theory Review 4 (4), 2002, 435-448 (with Steffen Huck).
Abstract: This note contributes to the discussion of decision problems with imperfect recall from an empirical point of view. We argue that, using standard methods of experimental economics, it is impossible to induce (or control for) absent--mindedness of subjects. Nevertheless, it is possible to test Gilboa's (1997) agent--based approach to games with imperfect recall. We implement his model of the absent--minded driver problem in an experiment and find, if subjects are repeatedly randomly rematched, strong support for the equilibrium prediction which coincides with Piccione and Rubinstein's (1997) ex ante solution of the driver's problem.
Simultaneous and sequential price competition on heterogeneous duopoly markets: Experimental evidence, International Journal of Industrial Organization 20, 2002, 1437-1460 (with Dorothea Kübler).
Abstract: We investigate simultaneous and sequential price competition in duopoly markets with differentiated products. In both markets symmetric firms are repeatedly and randomly matched. The strategy method is used to elicit behavior in the sequential market. We find that average leader prices in the sequential market are higher than average prices in the simultaneous market, just as predicted by the theory, whereas average follower prices are not above average prices in the simultaneous market, in contrast to the theoretical prediction. Furthermore, second movers gain from the sequential structure in comparison to simultaneous-move markets whereas first movers do not. As in theory, there is a significant first--mover disadvantage when firms decide sequentially. Finally, to assess the robustness of our findings, we report the results of control treatments varying the matching scheme and the mode of eliciting choices (strategy method vs. standard sequential play).
The merger paradox and why aspiration levels let it fail in the laboratory (with Steffen Huck, Kai A. Konrad and Hans-Theo Normann)
Abstract: In this paper, we study the merger paradox, a relative of Harsanyi's bargaining paradox, in an experiment. We examine bilateral mergers (that are predicted not to be profitable) in experimental Cournot markets with initially three or four firms. Theory predicts total outputs well. However, merged firms are significantly more aggressive than their competitors. As a result, mergers can be (weakly) profitable. By analyzing two control treatments, we provide an explanation for these results based on the notion of aspiration levels. In a further control treatment, we show that the same logic also operates in the case of a new firm entering a market. These results have some general consequences for adaptive play in changing environments.
Burning money and (pseudo) first-mover advantages: An experimental study on forward induction, Games and Economic Behavior 51, 2005, 109-127 (with Steffen Huck).
Abstract: The mere potential for one player to burn money prior to play has been shown in theory to be an effetive device to select this player's most preferred outcome in e.g. the battle-of-the-sexes game (see van Damme, JET 1989, and Ben-Porath and Dekel, JET 1992). The experiments reported in this study were designed to assess the behavioral relevance of this theoretical claim. It is shown that its validity depends on whether the game is played in extensive or normal form. In extensive form games first movers benefit substantially from having the opportunity to burn money in advance. This does not hold in normal form games. Moreover, the study suggests that we need to make theoretical advances to understand the role of physical timing and first-mover advantages in full.
Noisy leadership: An experimental approach (with Werner Güth and Yossi Spiegel).
Abstract: We examine the strategic behavior of leaders and followers in sequential duopoly experiments in which followers either perfectly observe the leaders' actions or else observe nothing. Our experiments show that consistent with the theory, leaders enjoy a greater first-mover advantage when followers observe their actions with higher probability. However, the results also show that (i) leaders do not fully exploit their first-mover advantage, (ii) when informed, followers tend to overreact slightly (i.e., choose quantities above their best-response to the leaders' quantities), and (iii) when uninformed, followers try to predict leaders' quantities and react optimally. This suggests that followers view the symmetric Cournot outcome as "fair" and whenever they observe leaders who are trying to exploit their first-mover advantage, they "punish" them by overreacting. Such punishments in turn induce leaders to behave more softly than the theory predicts.
Conjectural variations and evolutionary stability: A new rationale for consistency, Journal of Theoretical and Institutional Economics, forthcoming (with Hans-Theo Normann).
Abstract: Adopting an evolutionary approach, we explain the conjectural variations firms may hold in duopoly. Given conjectures, firms play the market game rationally. Success in the market game determines fitness in the evolutionary game. Based on linear heterogenous Cournot and Bertrand competition models, we show that the unique conjectures which are evolutionarily stable are consistent in that they anticipate rivals' behavior correctly.
Allowing for two production periods in the Cournot duopoly: Experimental evidence, Journal of Economic Behavior and Organization, forthcoming.
Abstract: In this study behavior in a Cournot duopoly with two production periods (the market clears only after the second period) is compared to behavior in a standard one-period Cournot duopoly. Theory predicts the endogenous emergence of a Stackelberg outcome in the two-period market. The results of the experiments, however, reveal that in both markets (roughly) symmetric outcomes emerge and that, after a short adaptation phase, verage industry output in the two-period markets is the same as in the standard one-period markets.
Workaholics and Drop Outs in Organizations (with Andrew Schotter).
Abstract: This paper reports the results of experiments designed to test the theory of the optimal composition of prizes in contests. We find that while in the aggregate the behavior of subjects is consistent with that predicted by the theory, such aggregate results mask an unexpected compositional effect on the individual level. While theory predicts that subject efforts are continuous and increasing functions of ability, the actual efforts of our laboratory subjects bifurcate. Low ability workers drop out and exert little or no effort while high ability subjects try too hard. This bifurcation, which is masked by aggregation, can be explained by assuming loss aversion on the part of the subjects.
From Ultimatum to Nash Bargaining: Theory and Experimental Evidence, Experimental Economics, forthcoming (with Sven Fischer, Werner Güth, and Andreas Stiehler).
Abstract: We examine theoretically and experimentally the strategic behavior of first and second movers in a two party bargaining game with uncertain information transmission. When the first mover states her demand, she does not know whether the second mover will be informed about it. If the second mover is informed, she can either accept or reject the offer and payoffs are determined as in the ultimatum game. If she is not informed, the second mover states her own demand and payoffs are determined as in the Nash demand game. In the experiment we vary the commonly known probability of information transmission. Our main finding is that first movers' and uninformed second movers' behavior is qualitatively in line with the game theoretic solution, that is, first movers' (uninformed second movers') demands are lower (higher) the lower the probability of a signal.
Job market signaling and screening: An experimental comparison (with Dorothea Kübler and Hans-Theo Normann).
Abstract: We analyze the Spence education game in experimental markets. We compare a signaling and a screening variant, and we analyze the effect of increasing the number of employers from two to three. In all treatments, there is a strong tendency to separate. More efficient workers invest more often and employers bid higher for workers who have invested. More efficient workers also earn higher wages. Employers' profits are usually not different from zero. Increased competition leads to higher wages only in the signaling sessions. We find that workers in the screening sessions invest more often and earn higher wages when there are two employers.
Spatial Voting with Endogenous Timing (with Steffen Huck and Vicki Knoblauch).
Abstract: We consider a model of (spatial) voting with endogenous timing. In line with what is observed in actual political campaigns, candidates can decide endogenously when and where to locate. More specifically, we analyze endogenous timing in a two-period n-candidate spatial-voting game on the unit interval. We show that this game possesses a pure strategy equilibrium*. The equilibrium* concept is a simplified version of subgame perfection defined by Osborne (1993) for use in games that possess no---or only very complex---subgame perfect equilibria. We demonstrate the latter point by also analyzing the subgame perfect equilibria in three-candidate spatial voting with endogenous timing.. Our results show that accounting for endogenous timing can eliminate some of the more unappealing equilibrium characteristics of the standard model.
Merger without cost advantages (with Steffen Huck and Kai A. Konrad).
Abstract: The seminal paper by Salant, Switzer and Reynolds (1983) showed that merger in a standard Cournot framework with linear demand and linear costs is not proftable unless a large majority of the firms are involved in the merger. However, many strategic aspects matter for firm competition such as the internal organization of the firm, the time structure of decision making, information aspects of competition, or the imbeddedness of firm competition in a strategic trade competition game between governments. This survey will reveal that the puzzle as in Salant, Switzer and Reynolds (1983) may be resolved without recurring to cost savings of merger. Firms interact with each other, with customers, suppliers, their owners, and with governments in many different ways, and inspection of these types of interaction reveals a multiplicity of reasons why merger can be profitable for the merging firms, even in Cournot markets with linear demand and cost.
Endogenous timing in duopoly: Experimental evidence (with Miguel Fonseca and Hans-Theo Normann).
Abstract: In this paper we experimentally investigate the extended game with observable delay of Hamilton and Slutsky (Games Econ. Beh., 1990). Firms bindingly announce a production period (one out of two periods) and then they produce in the announced sequence. Theory predicts simultaneous production in period one but we find that a substantial proportion of subjects choose the second period.
Endogenous preemption on both sides of a market (with Werner Güth and Jan Potters).
Conjectural variations and evolutionary stability in finite populations (with Hans-Theo Normann).
The Miracle as a Randomization Device: A Lesson from Richard Wagner's Romantic Opera Tannhäuser und der Sängerkrieg auf Wartburg (with Heike Harmgart and Steffen Huck).
Oligopoly limit-pricing in the lab (with Yossi Spiegel and Yaron Yehezkel).
Allais for All: Revisiting the paradox in a large representative sample (with Steffen Huck).
The distribution of harm in price-fixing cases (with Jan Boone).
Bertrand competition with convex costs in symmetric and asymmetric markets: Results from a pilot study (with Cedric Argenton).
Collusion through price ceilings? In search of a focal-point effect (with Dirk Engelmann).
Naked exclusion in the lab: The case of sequential contracting (with Jan Boone and Sigrid Suetens).
Signaling without common prior: An experiment (with Michalis Drouvelis and Alex Possajennikov).
Collusion in experimental Bertrand duopolies with convex costs: The role of cost asymmetry (with Cédric Argenton).
Taxation and Market Power (with Kai A. Konrad and Florian Morath).
Who is (More) Rational? (with Syngjoo Choi and Shachar Kariv).
Nudges and Impatience: Evidence from a Large Scale Experiment (with Eline van der Heijden, Tobias J. Klein and Jan Potters).
Who acts more like a game theorist? Group and individual play in a sequential market game and the effect of the time horizon (with Fangfang Tan).
Output Commitment through Product Bundling: Experimental Evidence (with Jeroen Hinloopen and Hans-Theo Normann).
Bertrand competition with asymmetric costs: Experimental evidence (with Jan Boone, María Jose Larraín Aylwin and Amrita Ray Chaudhuri).