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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.

Merger, Organization, Information, Market Structure

Abstract:
We study the merger paradox, a relative of Harsanyi's bargaining paradox, in an experiment. We examine bilateral mergers in experimental Cournot markets with initially three or four firms. Standard Cournot-Nash equilibrium predicts total outputs well. However, merged firms produce significantly more output than their competitors. As a result, mergers are not unprofitable. By analyzing control treatments, we provide an explanation for these results based on the notion of aspiration levels, and that the same logic also operates when a new firm enters a market. These results have some general consequences for adaptive play in changing environments.

Aspiration levels, Cournot, experiments, merger, merger psychology, oligopoly, entry

Abstract:
Article 82 of the EC Treaty states that any abuse of a dominant position is prohibited, and mentions four examples of abuses: (i) directly or indirectly imposing unfair prices or other unfair trading conditions; (ii) limiting production or development to the prejudice of consumers; (iii) unequal treatment of trading parties, thereby placing some at a competitive disadvantage; and (iv) making use of tying contracts, hence, forcing unnecessary supplementary obligations on customers.

Abstract:
Competition in some markets is a contest. This paper studies the merger incentives in such markets. Merger can be profitable. The profitability depends on the post-merger contest structure, the discriminatory power of the contest and on the number of contestants.

Contests, merger

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 profitable 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.

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.

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.

Job-market signaling, job-market screening, sorting, Bayesian games, experiments

Abstract:
We consider a vertically related industry and analyze how the total harm due to a price increase upstream is distributed over downstream firms and final consumers. For this purpose, we develop a general model without making specific assumptions regarding demand, costs, or the mode of competition. We consider both the case of homogeneous and differentiated goods markets. Furthermore, we discuss data requirements and suggest explicit formulas and regression specifications that can be used to estimate the relevant terms in the harm distribution in practice, even if elevated upstream prices are rather constant over time. The latter can be achieved by considering perturbations of the demand curve. This in turn can be used to construct a supply curve for the case of imperfect competition that includes perfect competition and monopoly as special cases. Finally, we illustrate how basic intuition from the tax incidence literature carries over to the distribution of harm.

abuse of a dominant position, apportionment of harm, cartel, pass on defense, supply curve, tax incidence

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.

Location Model, Nonconvergence, Focal Point, Best-Response Dynamics

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.

Experimental economics, oligopoly, inequality aversion, managerial incentives, strategic delegation

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.

Strategic Delegation, Managerial Incentives, Experimental Economics

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.

Commitment, imperfect observability, ultimatum bargaining game, Nash bargaining game, experiments

Abstract:
With this study we resume the search for a collusive focal-point effect of price ceilings in laboratory markets. We argue that market conditions in previous studies were unfavorable for collusion which may have been responsible for not finding such a focal-point effect. Our design aims at maximizing the likelihood of a focal-point effect. Nevertheless, our results again fail to support the focal-point hypothesis. Collusion is as unlikely in markets with a price ceiling as in markets with unconstrained pricing. Overall, the static Nash equilibrium predicts the data fairly accurately. We argue that this might warrant re-interpretation of field studies on anti-competitive effects of price ceilings.

Collusion, competition policy, experimental economics, focal point

Abstract:
We report experimental results on exclusive dealing inspired by the literature on "naked exclusion." Our key findings are: First, exclusion of a more efficient entrant is a widespread phenomenon in lab markets. Second, allowing incumbents to discriminate between buyers increases exclusion rates compared to the non-discriminatory case only when payments to buyers can be offered sequentially and secretly. Third, allowing discrimination does not lead to significant decreases in costs of exclusion. Accounting for the observation that buyers are more likely to accept an exclusive deal the higher is the payment, substantially improves the fit between theoretical predictions and observed behavior.

coordination, entry deterrence, exclusive dealing, experiments, externalities, foreclosure

Abstract:
We report experimental results on exclusive dealing inspired by the literature on “naked exclusion”. Our key findings are: First, exclusion of a more efficient entrant is a widespread phenomenon in lab markets. Second, allowing incumbents to discriminate between buyers increases exclusion rates compared to the non-discriminatory case only when payments to buyers can be offered sequentially and secretly. Third, allowing discrimination does not lead to significant decreases in costs of exclusion. Accounting for the observation that buyers are more likely to accept an exclusive deal the higher is the payment, substantially improves the fit between theoretical predictions and observed behavior.

exclusive dealing, entry deterrence, foreclosure, contracts, externalities, coordination, experiments

Abstract:
We examine the behavior of senders and receivers in the context of oligopoly limit pricing experiments in which high prices chosen by two privately informed incumbents may signal to a potential entrant that the industry-wide costs are high and that entry is unprofitable. The results provide strong support for the theoretical prediction that the incumbents can credibly deter unprofitable entry without having to distort their prices away from their full information levels. Yet, in a large number of cases, asymmetric information induces incumbents to raise prices when costs are low. The results also show that the entrants' behavior is by and large bi-polar: entrants tend to enter when the incumbents' prices are low but tend to stay out when the incumbents' prices are high.

oligopoly limit pricing, multi-sender signalling, full information equilibrium

Abstract:
In this paper we provide textual evidence on the sophistication of medieval deterrence strategies. Drawing on one of the great opera librettos based on medieval sources, Wagner's Tannhäuser, we shall illustrate the use of optimal randomization strategies that can be derived by applying notions of dominance or trembling-hand perfection. Particular attention is paid to the employed randomization device.

crime and punishment, sins and absolution, Richard Wagner, Tannhäuser, trembling-hand perfection, optimal randomization

Abstract:
Merged firms are typically rather complex organizations. 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.

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.

Abstract:
We study a market in which both buyers and sellers can decide to preempt and set their quantities before market clearing. Will this lead to preemption on both sides of the market, only one side of the market, or to no preemption at all? We find that preemption tends to be asymmetric in the sense that it is restricted to only one side of the market (buyers or sellers).

preemptio,; endogenous timing

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.

Commitment, endogeneous timing, experimental economics, Cournot, Stackelberg

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.

Voting, political economy, games, general equilibrium

Abstract:
The common prior assumption is pervasive in game-theoretic models with incomplete information. This paper investigates experimentally the importance of inducing a common prior in a two-person signaling game. For a specific probability distribution of the sender’s type, the long-run behavior without an induced common prior is shown to be different from the behavior when a common prior is induced, while for other distributions behavior is similar under both regimes. We also present a learning model that allows players to learn about the other players’ strategies and the prior distribution of the sender’s type. We show that this learning model accurately accounts for all main features of the data.

common prior, signaling, experiment, learning

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. We show that the unique conjectures which are evolutionarily stable are consistent in that they anticipate rivals' behavior correctly.

Consistent conjectures, duopoly, evolutionary stability, indirect evolutionary approach

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 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 nor effort while high ability subjects try too hard. This discontinuity, which is masked by aggregation, has significant consequences for behavior in organizations.

Contests, all-pay auctions, experiments

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 adaption phase, average industry output in the two-period markets is the same as in the standard one-period markets.

Cournot duopoly, Stackelberg, flexibility, experiments

Abstract:
In this study we propose a formal framework for the indirect evolutionary approach initiated by Guth and Yaari. It allows us 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.