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Fairness, Errors and the Power of Competition

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Author Info
Urs Fischbacher
Christina M. Fong
Ernst Fehr

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Abstract

One of the most basic questions in economics concerns the effects of competition on market prices. We show that the neglect of both fairness concerns and decision errors prevents a satisfactory understanding of how competition affects prices. We conducted experiments which demonstrate that the introduction of even a very small amount of competition to a bilateral exchange situation – by adding just one competitor – induces large behavioral changes among buyers and sellers, causing large changes in market prices. Models that assume that all people are self-interested and fully rational fail to explain these changes satisfactorily. In contrast, a model that combines heterogeneous fairness concerns with decision errors predicts all comparative static effects of changes in competition correctly. Moreover, the combined model enables us to predict the entire distribution of prices in many different competitive situations remarkably well.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp133.

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Handle: RePEc:zur:iewwpx:133

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Related research
Keywords: Competition; Fairness; Reciprocity; Quantal Response Equilibrium;

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D40 - Microeconomics - - Market Structure and Pricing - - - General

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jacob K. Goeree & Charles A. Holt & Thomas R. Palfrey, 2000. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Virginia Economics Online Papers 345, University of Virginia, Department of Economics. [Downloadable!]
    Other versions:
  2. Dufwenberg, M. & Kirchsteiger, G., 1998. "A theory of sequential reciprocity," Discussion Paper 37, Tilburg University, Center for Economic Research. [Downloadable!]
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  3. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
  4. Gary E. Bolton & Axel Ockenfels, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March. [Downloadable!] (restricted)
  5. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics. [Downloadable!]
  6. Fehr, Ernst & Schmidt, Klaus M., 2001. "Theories of Fairness and Reciprocity," Discussion Papers in Economics 14, University of Munich, Department of Economics. [Downloadable!]
  7. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series 1042, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  8. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 817-868, August. [Downloadable!] (restricted)
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  9. Camerer, Colin F & Thaler, Richard H, 1995. "Ultimatums, Dictators and Manners," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 209-19, Spring. [Downloadable!] (restricted)
  10. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February. [Downloadable!] (restricted)
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  11. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February. [Downloadable!] (restricted)
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  12. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Matthias Benz & Bruno S. Frey, . "Corporate Governance: What can we Learn from Public Governance?," IEW - Working Papers iewwp166, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  2. Armin Falk & Urs Fischbacher & Simon Gächter, . "Living in Two Neighborhoods - Social Interactions in the Lab," IEW - Working Papers iewwp150, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  3. Ernst Fehr & Klaus M. Schmidt, . "The Role of Equality, Efficiency, and Rawlsian Motives in Social Preferences: A Reply to Engelmann and Strobel," IEW - Working Papers iewwp179, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  4. Matthias Benz & Bruno S. Frey, . "The Value of Autonomy: Evidence from the Self-Employed in 23 Countries," IEW - Working Papers iewwp173, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  5. Aleksander Berentsen & Guillaume Rocheteau, . "On the Friedman Rule in Search Models with Divisible Money," IEW - Working Papers iewwp155, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  6. Aleksander Berentsen & Esther Brügger & Simon Lörtscher, . "On Cheating and Whistle-Blowing," IEW - Working Papers iewwp153, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  7. Bruno S. Frey, . "Direct Democracy for Transition Countries," IEW - Working Papers iewwp165, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  8. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006. "Competition, Hidden Information, and Efficiency: an Experiment," Working Papers 0605, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
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  9. Armin Falk, Michael Kosfeld, . "It's all about Connections: Evidence on Network Formation," IEW - Working Papers iewwp146, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  10. Bruno S. Frey & Alois Stutzer, . "Direct Democracy: Designing a Living Constitution," IEW - Working Papers iewwp167, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  11. Colin Camerer & Ernst Fehr, 2003. "Measuring social norms and preferences using experimental games: A guide for social scientists," Levine's Bibliography 506439000000000501, UCLA Department of Economics. [Downloadable!]
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  12. Thorsten Hens & P. Jean-Jacques Herings & Arkadi Predtetchinskii, . "Limits to Arbitrage when Market Participation Is Restricted," IEW - Working Papers iewwp176, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  13. Igor Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Evolutionary Stable Stock Markets," IEW - Working Papers iewwp170, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  14. Michael Kosfeld, . "Network Experiments," IEW - Working Papers iewwp152, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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