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Industrial organization in the laboratory

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  • Max Albert

    ()
    (University of Giessen)

  • Andreas Hildenbrand

    ()
    (University of Giessen)

Abstract

Theories of industrial organization (IO) are tested in the laboratory more and more often. The example we consider throughout the paper is oligopoly theory, specifically, the Cournot and the Stackelberg model of duopolistic quantity competition with homogeneous products. These models have often been subjected to tests: participants were told that they represented firms and received profits according to their chosen quantities. However, testing a theory in the laboratory requires that the experimental design falls into the domain of the theory. The domain of mainstream IO is market behaviour of large (i.e., multi-agent) firms. The basic hypothesis is that these firms maximize profits. This hypothesis cannot be tested in experiments where single agents are told that they represent firms. For a test, it would be necessary to assume that multi-agent groups and single agents show the same behaviour. This assumption is inconsistent with all current theories of individual behaviour and has, moreover, been falsified in many experiments. It follows that many alleged experimental tests of IO models are irrelevant to mainstream IO. This raises the question of whether relevant laboratory tests are possible at all. The answer is positive if one considers theories of the firm that relate organizational behaviour to the internal structure of the firm, like Alchian and Demsetz’s (1972) contractual view of the firm.

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File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/05-2012_hildenbrand.pdf
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201205.

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Length: 27 pages
Date of creation: 2012
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201205

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Related research

Keywords: industrial organization; oligopoly theory; behavioural economics; laboratory experiments; theory of the firm; homo oeconomicus;

References

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  1. Philippe Raab & Burkhard C. Schipper, 2004. "Cournot Competition between Teams: An Experimental Study," Bonn Econ Discussion Papers bgse13_2004, University of Bonn, Germany.
  2. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  3. Hildenbrand, Andreas, 2010. "Cournot or Stackelberg competition? A survey on experimental evidence," MPRA Paper 24468, University Library of Munich, Germany.
  4. Normann, Hans-Theo & Ruffle, Bradley, 2011. "Introduction to the special issue on experiments in industrial organization," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 1-3, January.
  5. Novshek, William., 1984. "On the Existence of Cournot Equilibrium," Working Papers 517, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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Citations

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Cited by:
  1. Hildenbrand, Andreas, 2012. "Is a "firm" a firm? A Stackelberg experiment," Economics Discussion Papers 2012-53, Kiel Institute for the World Economy.
  2. Andreas Hildenbrand & Mihael Duran, 2013. "The Role of Managerial Work in Market Performance: A Monopoly Model with Team Production," MAGKS Papers on Economics 201353, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Budzinski, Oliver, 2012. "Empirische Ex-Post Evaluation von wettbewerbspolitischen Entscheidungen: Methodische Anmerkungen," Ilmenau Economics Discussion Papers 69, Ilmenau University of Technology, Institute of Economics.

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