Foundations and Limitations
Edited by Josef Drexl, Wolfgang Kerber and Rupprecht Podszun
Chapter 12: Using Experimental Economics to Understand Competition
12. Using experimental economics to understand competition Bart J. Wilson* 1. INTRODUCTION What can a college sophomore tell us about strategic market interactions of an antitrust concern? Verbally not much and certainly nothing constructive for a deposition on a matter headed for litigation. What then can we learn from an undergraduate setting prices for a fictitious commodity in a market conducted in a computer laboratory over the course of 90 minutes? The answer lies not in asking what any single student can articulate about what he knows about market competition but, rather, in observing what groups of cash-motivated participants do and don’t do when faced with a focussed task replicated under a common set of initial conditions. Experimental economics is a laboratory method of inquiry for studying how individuals interact in controlled settings defined by a specific set of rules. When applied to issues of antitrust, the rules typically resemble an auction or another market institution in which, for salient rewards, people ‘buy’ or ‘sell’ products. Figure 12.1 summarizes the generic structure of an economic system in the laboratory. At the centre of a market experiment is the institution. A market institution is comprised of all the detailed rules, formal and informal, that define what market participants can and cannot do. For example, stock exchanges formally require members to submit asks for their offers to sell and buyers can either accept such offers or submit their own bids to buy, which the sellers can accept. In contrast, the custom in...
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