Does Competition Justify Inequality?

44 Pages Posted: 20 Jan 2016

See all articles by Björn Bartling

Björn Bartling

University of Zurich - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Manuel Grieder

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS); Zurich University of Applied Sciences (ZHAW)

Christian Zehnder

University of Lausanne

Multiple version iconThere are 3 versions of this paper

Date Written: December 16, 2015

Abstract

Are competitive mechanisms perceived as just sources of economic inequality? Perceptions of fairness violations can have severe economic consequences, as they may cause counterproductive behavior such as rule book slowdowns or quality shading. To analyze fairness perceptions associated with competitive mechanisms, we run laboratory experiments where a single powerful buyer can trade with one of several sellers - an environment that can lead to pronounced inequality among the interacting parties. Once the terms of trade are determined, sellers can engage in counterproductive behavior. We robustly find that low procurement prices, which allocate most of the surplus from trade to the buyer, trigger significantly less counterproductive behavior if the buyer uses a competitive auction to determine the terms of trade than if he uses his price setting power to dictate the same terms directly. Our data demonstrate that competitive mechanisms, in addition to their capability to produce efficient allocations, can reduce conflict and inefficient reactions by increasing justification for economic inequality.

Keywords: fairness, competition, markets, efficiency, inequality

JEL Classification: C910, D310, D630, P100

Suggested Citation

Bartling, Björn and Grieder, Manuel and Zehnder, Christian, Does Competition Justify Inequality? (December 16, 2015). CESifo Working Paper Series No. 5651. Available at SSRN: https://ssrn.com/abstract=2718885

Björn Bartling (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Manuel Grieder

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS) ( email )

Chair of Economics
Clausiusstrasse 87
Zurich, 8093
Switzerland

Zurich University of Applied Sciences (ZHAW)

Center for Energy and the Environment
School of Management and Law
Winterthur, CH 8401
Switzerland

Christian Zehnder

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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