Group Identity in Markets

Abstract

We present a laboratory experiment that measures the effects of group identity -- one's perceived membership in social groups -- on market transactions in an oligopoly market with a few sellers and buyers. We artificially induce group identity using art preferences and college majors in different treatments, respectively. Subjects are randomly assigned into the roles of buyers and sellers and interact repeatedly. We find that the presence of groups influences both the selection of trade partners and the determination of prices. All else equal, sellers are more likely to make offers to ingroup buyers, but this ingroup favoritism depends on the profile of seller-buyer intrinsic values. We also find that whenever buyers are more likely to accept offers from ingroup sellers, there are considerable ingroup-outgroup price differentials with outgroup sellers charging a lower price than ingroup sellers.