Abstract
This paper tests the hypothesis that a (partial) reason why cartels—collective but costly and non-binding price agreements—lead to higher prices in a Bertrand oligopoly could be because of a selection effect: decision-makers who are willing to form price agreements are more likely to be less competitive and pick higher prices in general. To test this hypothesis we run an experiment where participants play two consecutive Bertrand pricing games: first a standard version without the opportunity to form agreements; followed by a version where participants can vote whether to have a (costly) non-binding agreement as a group to pick the highest number. We find no statistically significant difference between the numbers picked in the first game by participants who vote for and against an agreement in the second game. We do confirm that having a non-binding agreement to cooperate leads to higher numbers being picked on average. Both participants who voted for and against the agreement increase the number they pick in situations with an agreement. However, this effect is bigger for participants who voted in favour.
Highlights
Games 2021, 12, 48. https://doi.org/Collective but non-binding agreements to act cooperatively have been shown to be effective and lead to better group outcomes in numerous economic situations
The experiment described in this paper fails to find evidence for the hypothesis that a reason why collective non-binding agreements to be less competitive lead to higher prices being picked in a Bertrand pricing game, is because these agreements are made by people who are less competitive in general
Participants who voted for the price agreement in the second game do not pick significantly higher numbers in the first game than people who voted against
Summary
Games 2021, 12, 48. https://doi.org/Collective but non-binding agreements to act cooperatively have been shown to be effective and lead to better group outcomes in numerous economic situations. From a theoretical perspective such agreements should have no effect on subsequent decisions In most settings they are unenforceable and costless to break and do not affect the pay-off structure of the game. They are, as such, nothing more than cheap talk because they do not change the dominant strategy. Still, these kinds of collective agreements to act in the best interest of the group have led to higher prices in oligopolies (for instance Apesteguia et al [1], Gillet et al [2]), less extraction in the common pool dilemma (Mosler [3]) and increased cooperation in different social dilemmas (Hopthrow and Abrams [4], Hopthrow and Hulbert [5]). This paper tests the hypothesis that a (partial) reason why collective agreements are effective, may be because of a selection effect: that the type of players who are willing to form these agreements are more likely in general to perform the behaviour that is being promised
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