Experimental Economics

Chapter 1 Introduction

The first classroom market games were conducted at Harvard by Edward Chamberlin. He proposed a new theory of monopolistic competition and he used experiments to highlight failures of the standard model of perfect competition. Chamberlin`s classroom markets produced some inefficiencies, which he attributed to the tendency for buyers and sellers in a market to break off and negotiate in small groups.

A double auction is a process of buying and selling goods when potential buyers submit their bids and potential sellers simultaneously submit their ask prices to an auctioneer, and then an auctioneer chooses some price p that clears the market: all the sellers who asked less than p sell and all buyers who bid more than p buy at this price p.  A trade occurs when the processes meet, i.e. when a buyer accepts a seller`s ask or when a seller accepts a buyer`s bid.

Nash equilibrium – is a set of strategies, one for each player, with the property that nobody wants to deviate from their planned action given the strategies being used by the other players.

Advantages of experimentation:

Treatment structure

Treatment is a completely specified set of procedures that include instructions, incentives and rules of play.

Calibration is a comparison between measurements – one of known magnitude or correctness made or set with one device and another measurement made in as similar a way as possible with a second device.

One treatment with real money and another with hypothetical money.

Between-subjects design – whether half of the people are assigned to each treatment.

Within-subject design – each person make decision in both treatments. Behavior for a group of subjects in one treatment is compared with behavior of same group in another treatment.

Sequence effect

Incentives. Typically experiments involve monetary rewards. Sometimes incentive matter a lot, sometimes don’t at all. People are more generous in offers to others when such offers are...