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Stackelberg in the lab: The effect of group decision making and “Cooling-off” periods

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  • Cardella, Eric
  • Chiu, Ray

Abstract

The Stackelberg duopoly is a fundamental model of sequential output competition. The equilibrium outcome of the model results in a first-mover advantage where the first-moving firm produces more output, and earns larger profits, relative to the second-moving firm. Huck, Müller, and Normann (2001) and Huck and Wallace (2002) test the Stackelberg duopoly in a lab setting and find that behavior is largely inconsistent with the equilibrium predictions of the model. We hypothesize that this inconsistency is a result of differences between the decision making environment implemented in the lab and firm environments in the field. In this paper, we experimentally investigate whether group decision making and a decision “cooling-off” period lead to more profit maximizing Stackelberg behavior in the lab. Specifically, we re-test the Stackelberg duopoly in the lab while implementing (i) two-person decision making groups, and (ii) a 10-min cooling-off period for second movers. In line with the previous studies, we find that second-mover response behavior is largely inconsistent with profit maximization. Furthermore, the implementation of groups and a cooling-off period has little effect on second-mover behavior. However, we find that group first-movers choose significantly lower output levels than individuals. While further from the equilibrium prediction, we show that these lower output choices by groups are more in-line with profit maximizing behavior, conditional on the non-profit maximizing response behavior of second-movers.

Suggested Citation

  • Cardella, Eric & Chiu, Ray, 2012. "Stackelberg in the lab: The effect of group decision making and “Cooling-off” periods," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1070-1083.
  • Handle: RePEc:eee:joepsy:v:33:y:2012:i:6:p:1070-1083
    DOI: 10.1016/j.joep.2012.07.004
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    Cited by:

    1. van Winden, Frans, 2015. "Political economy with affect: On the role of emotions and relationships in political economics," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 298-311.
    2. repec:eee:ecolet:v:162:y:2018:i:c:p:98-100 is not listed on IDEAS
    3. Atwell Courtenay, 2015. "Cooling off periods in franchise contracts: from consumer protection mechanisms to paternalistic remedies for behavioral biases," Business and Politics, De Gruyter, vol. 17(4), pages 697-721, December.
    4. Raimo P. Hämäläinen & Ilkka Leppänen, 2017. "Cheap talk and cooperation in Stackelberg games," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 25(2), pages 261-285, June.
    5. Thum, Marcel & Auerswald, Heike & Schmidt, Carsten & Torsvik, Gaute, 2014. "Teams Contribute More and Punish Less," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100537, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Stackelberg; Group decision making; Cooling-off periods;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D20 - Microeconomics - - Production and Organizations - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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