Year: 2003
Type: report
Abstract: : One of the most basic questions in economics concerns the effects of competition on market prices. We show that the neglect of fairness concerns prevents a satisfactory understanding of how the intensity of competition affects prices. We conduct experiments that demonstrate that introducing 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 dramatic changes in market prices. Models that assume that all people are self-interested fail to provide a satisfactory explanation of these changes. In contrast, models taking into account heterogeneous fairness concerns predict the qualitative and quantitative effects of changes in competition correctly. By combining the fairness approach with models of noisy best reply behavior we can predict the entire distribution of prices in many different competitive situations remarkably well.
Language: English
Subfield: Safety Research
Field: Social Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1903760211