Abstract

Abstract Industrial organization is mainly concerned with the behavior of large firms, especially when it comes to oligopoly theory. Experimental industrial organization, therefore, faces a problem: How can firms be brought into the laboratory? The main approach relies on framing: Call individuals “firms”! This experimental approach is not in line with modern industrial organization, according to which a firm’s market behavior is also determined by its organizational structure. In this paper, a Stackelberg experiment is considered in order to answer the question whether framing individual decision making as firm decision making or implementing an organizational structure is more effective for generating profit-maximizing behavior. Firms are either represented by individuals or by teams. Teams are organized according to a parsimonious version of Alchian and Demsetz’s (Production, Information Costs, and Economic Organization, 1972) contractual model of the firm. The author finds teams’ quantity choices are more in line with the assumption of profit maximization than individuals’ choices. Compared to individuals, teams appear to be less inequality averse.

Highlights

  • For Tirole (1988, p. 3), industrial organization (IO) “certainly begins with the structure and behavior of firms”

  • I conduct a Stackelberg experiment using Huck et al.’s (2001) market structure, which is used by Müller and Tan (2011), in order to answer the question whether framing individual decision making as firm decision making or implement

  • Teams each consist of a decision maker and a non-decision maker

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Summary

Introduction

For Tirole (1988, p. 3), industrial organization (IO) “certainly begins with the structure and behavior of firms”. On the basis of a Stackelberg game, an answer to the second question is given by Müller and Tan (2011).6 In their Stackelberg experiment, they study a market for a homogeneous product on which two firms sequentially compete in quantities. If the market structure is derived from a Cournot game, both individuals and teams appear to be profit maximizers. Their market behavior seems to be independent of the organizational structure. Depending on the organizational structure, teams or groups come closer to profit-maximizing behavior than individuals. I conduct a Stackelberg experiment using Huck et al.’s (2001) market structure, which is used by Müller and Tan (2011), in order to answer the question whether framing individual decision making as firm decision making or implement-. The appendix contains English translations of the instructions (originally written in German) and the payoff bimatrix used in all treatments

Experimental design
Procedures
Hypotheses and experimental results
A firm framing directs individual behavior towards profit maximization
Conclusion
Translated instructions
Findings

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