nep-exp New Economics Papers
on Experimental Economics
Issue of 2005‒06‒14
eleven papers chosen by
Daniel Houser
George Mason University

  1. Collusion in Growing and Shrinking Markets: Empirical Evidence from Experimental Duopolies By Klaus Abbink; Jordi Brandts
  2. Experimental Evidence on the Persistence of Output and Inflation By Adam, Klaus
  3. Demand Reduction and Pre-emptive Bidding in Multi-Unit License Auctions By Goeree, Jacob K.; Offerman, Theo; Sloof, Randolph
  4. The Insiders' Dilemma: An Experiment on Merger Formation By Lindqvist, Tobias; Stennek, Johan
  5. The Behavioral Effects of Minimum Wages By Armin Falk; Ernst Fehr; Christian Zehnder
  6. Can Endogenous Group Formation Prevent Coordination Failure? A Theoretical and Experimental Investigation By Philippe Raab
  7. Trust, communication and equlibrium behaviour in public goods By Alexis Belianin; Marco Novarese
  8. Equilibrium PLay and Best Response to (Stated) Beliefs in Constant Sum Games By Pedro Rey Biel
  9. Equilibrium Play and Best Response in Sequential Constant Sum Games By Pedro Rey Biel
  10. Rationality, Tort Reform and Contingent Valuation: A Classroom Experiment in Starting Point Bias By Victor Matheson
  11. Do experimental subjects favor their friends? By Pablo Brañas-Garza; Miguel Angel Durán; María Paz Espinosa

  1. By: Klaus Abbink; Jordi Brandts
    Abstract: We study collusive behaviour in experimental duopolies that compete in prices under dynamic demand conditions. In one treatment the demand grows at a constant rate. In the other treatment the demand declines at another constant rate. The rates are chosen so that the evolution of the demand in one case is just the reverse in time than the one for the other case. We use a box-design demand function so that there are no issues of finding and co-ordinating on the collusive price. Contrary to game-theoretic reasoning, our results show that collusion is significantly larger when the demand shrinks than when it grows. We conjecture that the prospect of rapidly declining profit opportunities exerts a disciplining effect on firms that facilitates collusion and discourages deviation.
    Keywords: Laboratory experiments, industrial organisation, oligopoly, price competition, collusion
    JEL: C90 C72 D43 D83 L13
    Date: 2005–02–01
  2. By: Adam, Klaus
    Abstract: This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behaviour emerges because subjects’ inflation expectations fail to be captured by rational expectations functions. Instead, a Restricted Perceptions Equilibrium (RPE), which assumes that agents use optimal but ’simple’ forecast functions, describes subjects’ inflation expectations surprisingly well and explains the observed behaviour of output and inflation.
    Keywords: experiments; output and inflation dynamics; rational expectations; restricted perceptions equilibrium
    JEL: C91 E32 E37
    Date: 2005–01
  3. By: Goeree, Jacob K.; Offerman, Theo; Sloof, Randolph
    Abstract: Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for pre-emptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and pre-emptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry by the newcomer imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and efficiency, while the two auction formats offer similar chances for newcomers to enter the market.
    Keywords: demand reduction; external effects; multi-license auctions
    JEL: C91 D44 D45
    Date: 2005–02
  4. By: Lindqvist, Tobias; Stennek, Johan
    Abstract: This paper tests the insiders’ dilemma hypothesis in a laboratory experiment. The insiders’ dilemma means that a profitable merger does not occur, because it is even more profitable for each firm to unilaterally stand as an outsider (Stigler, 1950; Kamien and Zang, 1990 and 1993). The experimental data provides support for the insiders’ dilemma, and thereby for endogenous rather than exogenous merger theory. More surprisingly, our data suggests that fairness (or relative performance) considerations also make profitable mergers difficult. Mergers that should occur in equilibrium do not, since they require an unequal split of surplus.
    Keywords: antitrust; coalition formation; experiment; insiders' dilemma; mergers
    JEL: C78 C92 G34 L13 L41
    Date: 2005–04
  5. By: Armin Falk (IZA Bonn and University of Bonn); Ernst Fehr (University of Zurich and IZA Bonn); Christian Zehnder (University of Zurich and IZA Bonn)
    Abstract: The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people’s behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.
    Keywords: minimum wages, labor market, monopsony, fairness, reservation wages, entitlement
    JEL: C91 D63 E64 J38 J42 J58 J68
    Date: 2005–06
  6. By: Philippe Raab (Bonn Graduate School of Economics and IZA Bonn)
    Abstract: This paper studies the effect of endogenous group formation on the outcome in two types of coordination games with multiple Pareto-ranked equilibria. Endogenous group formation means that in each period players are free to choose among two or more groups within which they want to play the coordination game. In the theoretical part we show that a simple myopic best reply dynamics under endogenous group formation leads to the payoff dominant outcome in both types of coordination games, independently of the initial strategy profile. In the experimental part we test this prediction. Our results show that the accuracy of the theoretical prediction is sensitive to the out-of-equilibrium properties of the respective coordination game. If the collective outcome is very sensitive to unilateral deviations, the coordination failure takes the same form under endogenous group formation as in the case of fixed groups. If, however, the coordination game is sufficiently robust against these unilateral deviations, coordination on the payoff dominant equilibrium is observed for the large majority of subjects under endogenous group formation. Moreover, in the former case we find the emergence of equally sized groups, while in the latter case large groups emerge. Interestingly, the respective group sizes can be interpreted as minimizing the individual’s risk of encountering coordination deteriorating players.
    Keywords: coordination games, endogenous group formation, minimum effort game, median effort game, experiment
    JEL: C72 C91 C92
    Date: 2005–06
  7. By: Alexis Belianin (International College of Economics & Finance ICEF , . Higher School of Economics); Marco Novarese (Centre for Cognitive Economics - Università del Piemonte Orientale)
    Abstract: This paper reports a novel cross-cultural public goods game experiment played in real time through Internet. Web-based software was used to compare the contributions to public good of different groups of participants: mixed, consisting of both Italians (students in law and economics) and Russians (students in economics), as well as all-Italian and all-Russian groups. This setup allows for testing for a number of effects, including participants’ awareness of the group composition in terms of nationality and gender of group members; possibility of coordination of one’s strategy during a cheap talk session organized before some of the games was used as an additional control. Our results show that the degree of cooperation is rather high, but does not vary significantly with nationalities of the group members, while communication tends to enhance contributions to public goods. A notable difference between the subjects representing the two nations is an overly strong and increasing cooperativeness of the Russian female participants in contrast to that of the Russian men, as well as the Italians.
    JEL: C9
    Date: 2005–06–01
  8. By: Pedro Rey Biel (University College London)
    Abstract: In a laboratory experiment, subjects played ten two-person 3x3 constant sum games and stated beliefs about the frequencies of play by their opponents. Contrary to previous experimental evidence, game-theoretical predictions work well: 80% of actions coincided with Nash equilibrium, subjects were good at predicting the action which was played with highest frequency and 73% of actions taken were best responses to stated beliefs. Complexity, measured by the necessary number of rounds of iterated deletion of dominated strategies to reach the equilibrium, did not affect behavior, although whether games were dominance solvable had an effect. We discuss possible reasons why results differ when the games and the experimental procedures are changed.
    Keywords: Experiments, Constant Sum Games, Belielfs
    JEL: C72 C91 D81
    Date: 2005–06–08
  9. By: Pedro Rey Biel (University College London)
    Abstract: We perform a further experiment to check the robustness of the main result in Rey Biel (2005) to sequential play. We find that Equilibrium predictions work even better when the same games are played sequentially: 85% of first movers choose the Equilibrium strategy and 85% of second movers best respond to the action taken by first movers. We conclude by identifying constant sum games as a class of games where experimental subjects' choices coincide with theory predictions and we argue that in such games distributional and reciprocal preferences do not influence subjects' decisions.
    Keywords: Experiments, Constant Sum Games, Best Response
    JEL: C72 C91 D81
    Date: 2005–06–08
  10. By: Victor Matheson (Department of Economics, College of the Holy Cross)
    Abstract: This simple classroom experiment demonstrates the existence of starting point bias. Asked to place a dollar value on a non-market good such as the loss of a limb or the destruction of a wetland, students place a much smaller value on the loss if a small value is first suggested by the questioner while placing a significantly higher value on the loss when a large value is originally suggested. This experiment can be used in theory classes to demonstrate the limits of individual rationality or in applied classes in law or environmental economics in relation to tort reform or contingent valuation.
    Keywords: starting point bias, contingent valuation, tort reform, classroom experiment, experimental economics
    JEL: A2 C42 C91 K41 Q51
    Date: 2005–06
  11. By: Pablo Brañas-Garza (Department of Economic Theory and Economic History, University of Granada); Miguel Angel Durán (Department of Economic Theory and Economic History, University of Granada); María Paz Espinosa (Universidad del País Vasco)
    Abstract: Ideally we would like subjects of experiments to be perfect strangers so that the situation they face at the lab is not just a part of a long run interaction. Unfortunately, it is not easy to reach those conditions and experimenters try to mitigate any effects coming form these out-of- the-lab relationships by, for instance, randomly matching subjects. However, even if this type of procedure is used, there is a positive probability that a subject faces a friend or an acquaintance. We find evidence that social proximity among subjects is irrelevant for experiments’ results in dictator games. Thus, although ideal conditions are not met, relations among subjects are not contaminating the experiments’ results.
    Keywords: experimental procedures, friendship effect, dictator game, fairness.
    JEL: C99 D63 D64
    Date: 2005–06–08

This nep-exp issue is ©2005 by Daniel Houser. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.