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The experimental literature on antitrust enforcement provides robust evidence that communication plays an important role for the formation and stability of cartels. We extend these studies through a design that distinguishes between innocuous communication and communication about a cartel, sanctioning only the latter. To this aim, we introduce a participant in the role of the competition authority, who is properly incentivized to judge communication content and price setting behavior of the firms. Using this novel design, we revisit the question whether a leniency rule successfully destabilizes cartels. In contrast to existing experimental studies, we find that a leniency rule does not affect cartelization. We discuss potential explanations for this contrasting result.
Numerous studies investigate which sanctioning institutions prevent cartel formation but little is known as to how these sanctions work. We contribute to understanding the inner workings of cartels by studying experimentally the effect of sanctioning institutions on firms’ communication. Using machine learning to organize the chat communication into topics, we find that firms are significantly less likely to communicate explicitly about price fixing when sanctioning institutions are present. At the same time, average prices are lower when communication is less explicit. A mediation analysis suggests that sanctions are effective in hindering cartel formation not only because they introduce a risk of being fined but also by reducing the prevalence of explicit price communication.
This paper sheds new light on the role of communication for cartel formation. Using machine learning to evaluate free-form chat communication among firms in a laboratory experiment, we identify typical communication patterns for both explicit cartel formation and indirect attempts to collude tacitly. We document that firms are less likely to communicate explicitly about price fixing and more likely to use indirect messages when sanctioning institutions are present. This effect of sanctions on communication reinforces the direct cartel-deterring effect of sanctions as collusion is more difficult to reach and sustain without an explicit agreement. Indirect messages have no, or even a negative, effect on prices.
This paper presents an experiment on the effect of retroactive price-reduction schemes on buyers’ repeated purchase decisions. Such schemes promise buyers a reduced price for all units that are bought in a certain time frame if the total quantity that is purchased passes a given threshold. This study finds a loyalty-enhancing effect of retroactive price-reduction schemes only if the buyers ex-ante expected that entering into the scheme would maximize their monetary gain, but later learn that they should leave the scheme. Furthermore, the effect crucially hinges on the framing of the price reduction.
This paper presents results from an experiment on the effects of recommended retail prices on consumer and retailer behaviour. We present evidence that recommended retail prices, despite their non-binding nature, influence consumers’ willingness to pay by setting a reference point. At a given price, consumers buy more the higher the recommended retail price is, and their demand drops at prices above the recommended retail price, even when it is entirely uninformative about the value of the product. Retailers in this study are subject to similar anchoring effects, but they do not anticipate consumers’ behaviour well and are thus not able to exploit their behavioural biases.
The Limits of Buyer Power
(2018)
This paper studies the behavior of buyers confronting an incumbent monopolist and a potential market entrant in a repeated trade situation. In the experiment, buyers have two possibilities to demand lower prices in future trade periods. First, they can withhold demand. Second, they can voluntarily pay a higher price to the entrant in order to encourage future re-entry. Both these forms of buyer behavior occur in the experiment. They are less frequent when the number of buyers is large as opposed to small. A control treatment tests to what extent such behavior can be attributed to strategic motives.
This paper presents an experiment on the effect of retroactive price-reduction schemes on buyers’ repeated purchase decisions. Such schemes promise buyers a reduced price for all units that are bought in a certain time frame if the total quantity that is purchased passes a given threshold. This study finds a loyalty-enhancing effect of retroactive price-reduction schemes only if the buyers ex-ante expected that entering into the scheme would maximize their monetary gain, but later learn that they should leave the scheme. Furthermore, the effect crucially hinges on the framing of the price reduction.
Strategic uncertainty is the uncertainty that players face with respect to the purposeful behavior of other players in an interactive decision situation. Our paper develops a new method for measuring strategic-uncertainty attitudes and distinguishing them from risk and ambiguity attitudes. We vary the source of uncertainty (whether strategic or not) across conditions in a ceteris paribus manner. We elicit certainty equivalents of participating in two strategic 2x2 games (a stag-hunt and a market-entry game) as well as certainty equivalents of related lotteries that yield the same possible payoffs with exogenously given probabilities (risk) and lotteries with unknown probabilities (ambiguity). We provide a structural model of uncertainty attitudes that allows us to measure a preference for or an aversion against the source of uncertainty, as well as optimism or pessimism regarding the desired outcome. We document systematic attitudes towards strategic uncertainty that vary across contexts. Under strategic complementarity [substitutability], the majority of participants tend to be pessimistic [optimistic] regarding the desired outcome. However, preferences for the source of uncertainty are distributed around zero.
Leadership plays an important role for the efficient and fair solution of social dilemmas but the effectiveness of a leader can vary substantially. Two main factors of leadership impact are the ability to induce high contributions by all group members and the (expected) fair use of power. Participants in our experiment decide about contributions to a public good. After all contributions are made, the leader can choose how much of the joint earnings to assign to herself; the remainder is distributed equally among the followers. Using machine learning techniques, we study whether the content of initial open statements by the group members predicts their behavior as a leader and whether groups are able to identify such clues and endogenously appoint a “good” leader to solve the dilemma. We find that leaders who promise fairness are more likely to behave fairly, and that followers appoint as leaders those who write more explicitly about fairness and efficiency. However, in their contribution decision, followers focus on the leader’s first-move contribution and place less importance on the content of the leader’s statements.
Being ignorant of key aspects of a strategic interaction can represent an advantage rather than a handicap. We study one particular context in which ignorance can be beneficial: iterated strategic interactions in which voluntary cooperation may be sustained into the final round if players voluntarily forego knowledge about the time horizon. We experimentally examine this option to remain ignorant about the time horizon in a finitely repeated two-person prisoners’ dilemma game. We confirm that pairs without horizon knowledge avoid the drop in cooperation that otherwise occurs toward the end of the game. However, this effect is superposed by cooperation declining more rapidly in pairs without horizon knowledge during the middle phase of the game, especially if players do not know that the other player also wanted to remain ignorant of the time horizon.