Firm-Specific Information and Explicit Collusion in Experimental Oligopolies

Firm-Specific Information and Explicit Collusion in Experimental Oligopolies
Date: 2015-05-10
By: Francisco Gomez-Martin (University of Amsterdam)
Sander Onderstal (University of Amsterdam)
Joep Sonnemans (University of Amsterdam)
We experimentally study the effect of information about competitors’ actions on cartel stability and firms’ incentives to form cartels in Cournot markets. As in previous experiments, markets become very competitive when individualized information is available and participants cannot communicate. In contrast, when communication is possible, results reverse: Markets become less competitive and cartels become more stable when individualized information is available. We also observe that the extra profits that firms obtain thanks to the possibility to communicate are higher when individualized information is present, suggesting that firms have greater incentives to form cartels in that situation.
Keywords: Cournot oligopoly; Cartels; Information; Experiments
JEL: C92 L13 L41


Spatial Coordination in Agglomeration Bonus Schemes with Transaction Costs and Communication: An Experimental Study

Spatial Coordination in Agglomeration Bonus Schemes with Transaction Costs and Communication: An Experimental Study
Date: 2015-05
By: Simanti Banerjee (University of Nebraska-Lincoln)
Timothy N. Cason (Purdue University)
Frans P. de Vries (University of Stirling)
Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews)
Agglomeration Bonus (AB) schemes reward private landowners to spatially coordinate land use decisions to enhance the supply of ecosystem services. The AB mechanism creates a coordination game with multiple Pareto ranked Nash equilibria, which correspond to different spatially-coordinated land use patterns. This paper experimentally analyses subjects’ participation decisions, land use choices and AB performance in the presence of transaction costs, with and without the option to communicate with neighboring subjects in a local network setting. The experiment varies transaction costs at two levels (high and low), which affects the risks and payoffs of coordinating on the different equilibria. Results indicate a significant difference in participation under high and low transaction costs in the early stages of the experiment. Increased experience reduces participation rates and AB performance. Costless pre-play communication induces full participation and land use choice pertaining to the efficient Nash equilibrium. If communication is costly, the level of transaction costs affects participation levels, the degree of spatial coordination, and the ecosystem services benefits produced. Our study suggests that performance of Payment for Ecosystem Services schemes in general and the AB scheme in particular can be improved through mechanisms intended to reduce the costs associated with participation and communication.
Keywords: Coordination Games, Lab Experiments, Local Networks, Payment for Ecosystem Services
JEL: C91 D83 D81 Q51 Q


The Role of Critical Mass in Establishing a Successful Network Market: An Experimental Investigation

The Role of Critical Mass in Establishing a Successful Network Market: An Experimental Investigation
Date: 2015-05-12
By: Bradley J. Ruffle, Avi Weiss, Amir Etziony (Wilfrid Laurier University)
A network market is a market in which the benefit each consumer derives from a good is an increasing function of the number of consumers who own the same or similar goods. A major obstacle that plagues the introduction of a network good is the ability to reach critical mass, namely, the minimum number of buyers required to render purchase worthwhile. This can be likened to a coordination game with multiple Pareto-ranked equilibria. Through a series of experiments, we study consumers’ ability to coordinate on purchasing the network good. Our results highlight the central importance of the level of the critical mass. Neither an improved reward-risk ratio through lower prices nor previous success at a lower critical mass facilitates the establishment of a network market when the critical mass is sufficiently high.
Keywords: experimental economics, network goods, coordination game, critical mass
JEL: C92 L19

Luring Others into Climate Action: Coalition Formation Games with Threshold and Spillover Effects

Date: 2015-03
By: Valentina Bosetti (Fondazione Eni Enrico Mattei, Milan (Italy) and Bocconi University, Milan (Italy))
Melanie Heugues (Fondazione Eni Enrico Mattei, Milan (Italy))
Alessandro Tavoni (Grantham Research Institute, London School of Economics, London (England))
We study the effect of leadership in an experimental threshold public ‘bad’ game, where we manipulate both the relative returns of two investments (the more productive of which causes a negative externality) and the extent to which the gains from leadership diffuse to the group. The game tradeoffs mimic those faced by countries choosing to what degree and when to transition from incumbent polluting technologies to cleaner alternatives, with the overall commitment dictating whether they manage to avert dangerous environmental thresholds. Leading countries, by agreeing on a shared effort, may be pivotal in triggering emission reductions in non-signatories countries. In addition, the leaders’ coalition might also work as innovation and technology adoption catalyzer, thus producing a public good (knowledge) that benefits all countries. In our game, players can choose to tie their hands to a cooperative strategy by signing up to a coalition of first movers. The game is setup such that as long as the leading group reaches a pivotal size, its early investment in the externality-free project may catalyze cooperation by non-signatories. We find that the likelihood of reaching the pivotal size is higher when the benefits of early cooperation are completely appropriated by the coalition members, less so when these benefits spillover to the non-signatories. On the other hand, spillovers have the potential to entice second movers into adopting the ‘clean’ technology.
Keywords: Climate Change, International Cooperation, R&D Spillovers, Threshold Public Goods Game, Coalition Formation Game, Climate Experiment
JEL: Q5 Q58

Penalty Structures and Deterrence in a Two-Stage Model: Experimental Evidence

Date: 2015-04
By: Lisa R. Anderson
Gregory DeAngelo
Winand Emons
Beth Freeborn
Hannes Lang
Increasing penalty structures for repeat offenses are ubiquitous in penal codes, despite little empirical or theoretical support. Multi-period models of criminal enforcement based on the standard economic approach of Becker (1968) generally find that the optimal penalty structure is either flat or declining. We experimentally test a two-stage theoretical model that predicts decreasing penalty structures will yield greater deterrence than increasing penalty structures. We find that decreasing fine structures are more effective at reducing risky behavior. Additionally, our econometric analyses reveal a number of behavioral findings. Subjects are deterred by past convictions, even though the probability of detection is independent across decisions. Further, subjects appear to take the two-stage nature of the decision making task into account, suggesting that subjects consider both current and future penalties. Even controlling for the fine a subject faces for any given decision, being in a decreasing fine structure has a significant effect on deterrence.
JEL: C91 K42 K10

Superstars need Social Benefits: An Experiment on Network Formation

Date: 2013-08-08
By: Boris van Leeuwen (University of Amsterdam)
Theo Offerman (University of Amsterdam)
Arthur Schram (University of Amsterdam)
We investigate contributions to the provision of public goods on a network when efficient provision requires the formation of a star network. We provide a theoretical analysis and study behavior in a controlled laboratory experiment. In a 2×2 design, we examine the effects of group size and the presence of (social) benefits for incoming links. We find that social benefits are highly important. They facilitate convergence to equilibrium networks and enhance the stability and efficiency of the outcome. Moreover, in large groups social benefits encourage the formation of superstars: star networks in which the core contributes more than expected in the stage-game equilibrium. We show that this result is predicted by a repeated game equilibrium.
Keywords: Network formation, networked public goods, peer production, social benefits, open source software
JEL: C91 D85 H41