Oligopoly as a Socially Embedded Dilemma: An Experiment
42 Pages Posted: 31 Jan 2011 Last revised: 11 Nov 2011
Date Written: November 2011
Abstract
From the perspective of competitors, competition may be modeled as a prisoner’s dilemma. Setting the monopoly price is cooperation, undercutting is defection. Jointly, competitors are better off if both are faithful to a cartel. Individually, profit is highest if only the competitor(s) is (are) loyal to the cartel. Yet collusion inflicts harm on the opposite market side and, through the deadweight loss, on society at large. Moreover, almost all legal orders combat cartels. Through the threat with antitrust intervention, gains from cooperation are uncertain. In the field, both qualifications combine. To prevent participants from using their world knowledge about antitrust, we experimentally test them on a neutral matrix game, with either a negative externality on a third participant, uncertainty about gains from cooperation, or both. Uncertainty dampens cooperation, though only slightly. Surprisingly, externalities are immaterial. If we control for beliefs, they even foster cooperation. If we combine both qualifications and do not control for beliefs, we only find an uncertainty effect. If we add beliefs as a control variable, we only find that externalities enhance cooperation, even if gains from collusion are uncertain. Hence the fact that the dilemma of oligopolists is socially embedded matters less than one might have expected.
Keywords: oligopoly, collusion, negative externalities, uncertainty, prisoner’s dilemma, experiment
JEL Classification: C72, C91, D03, D22, D43, D62, D81, H23, K21, K42, L13, L41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Within-Subject Analysis of Other-Regarding Preferences
By Mariana Blanco, Dirk Engelmann, ...
-
Preferences and Beliefs in a Sequential Social Dilemma: A Within-Subjects Analysis
By Mariana Blanco, Dirk Engelmann, ...
-
Belief Elicitation in Experiments: Is There a Hedging Problem?
By Mariana Blanco, Dirk Engelmann, ...
-
Appendix for: Belief Elicitation in Experiments: Is There a Hedging Problem?
By Mariana Blanco, Dirk Engelmann, ...
-
Belief Elicitation in Experiments: Is There a Hedging Problem?
By Mariana Blanco, Dirk Engelmann, ...
-
Risky Curves: From Unobservable Utility to Observable Opportunity Sets
By Daniel Friedman and Shyam Sunder
-
Career Concerns Incentives: An Experimental Test
By Alexander K. Koch, Albrecht Morgenstern, ...
-
Inequity Aversion and Individual Behavior in Public Good Games: An Experimental Investigation
By Astrid Dannenberg, Thomas Riechmann, ...
-
By Guy Mayraz
-
Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts