Competitive Pricing Reduces Wasteful Counterproductive Behaviors
68 Pages Posted: 24 May 2014 Last revised: 21 Jan 2019
Date Written: August 10, 2017
Counterproductive reactions to unfavorable trading prices can cause inefficiencies in economic exchange. This paper studies whether the use of a competitive pricing mechanism reduces such wasteful activities. We report data from a laboratory experiment where a powerful buyer can trade with one of two sellers - an environment that can lead to very low prices for the sellers. We find that low procurement prices trigger significantly less punishment by sellers if the buyer uses a competitive auction rather than his price-setting power to dictate the same terms of trade directly. Our data suggest that the use of competitive pricing mechanisms can mitigate inefficient reactions to unequal distributions of trade surplus.
Keywords: Counterproductive behavior, competitive pricing, markets, auctions, efficiency, inequality
JEL Classification: C91, D31, D63, P10
Suggested Citation: Suggested Citation