Industrial Organization and Experimental Economics: How to Learn from Laboratory Experiments

Experimental economists frequently claim that they can contribute to industrial organization (IO) by observing individual behavior in, for example, Cournot or Stackelberg games. In these experiments, they regularly falsify the hypothesis of profit maximization, which is, by and large, retained in applied IO. However, what experimental economists test in the laboratory is, at best, the theory of single-person firms. In contrast, empirical IO studies quite large organizations on the basis of field data, while theoretical IO is concerned with internal organization and its links to market behavior. From a modern theory-testing perspective, many experiments should therefore be considered as irrelevant to modern IO; the focus of experimental IO must change if experimental economists want to contribute to IO.