Do Collusive Norms Maximize Profits? Evidence from a Vegetable Market Experiment in India

Abstract

Social norms have been shown to facilitate anti-competitive behavior in decentralized markets. We demonstrate these norms can also reduce aggregate profits. First, we present descriptive evidence of competition-suppressing norms in Kolkata vegetable markets. We then report on a market-level experiment in which we induced a temporary relaxation of these norms by subsidizing some vendors to sell additional produce. Our intervention raised profits at the market level by over 60%, excluding the subsidy. Nevertheless, after the subsidy ended vendors largely stopped selling the additional produce. Our results suggest anti-competitive norms may partially explain the pervasiveness of small-scale firms in developing countries.