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Managers and Students as Newsvendors - How Out-of-Task Experience Matters

Gary E Bolton, Axel Ockenfels, Ulrich Thonemann
University of Cologne, Working Paper Series in Economics No. 39, 2008

We compare how freshmen business students, graduate business students and experienced procurement managers perform on a simple inventory ordering task. We find that, qualitatively, managers exhibit ordering behavior similar to students, including biased ordering towards average demand. Experience, however, affects subjects’ utilization of information. The managers’ work experience seems most valuable when there is only historical demand data to guide decision making, while students better utilize analytical information and task training. As a result, when information necessary to solve the problem to optimality is added to historical information, students catch up to the managers, and students with classroom experience in operations management outperform managers.

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Investment decisions in Liberalized Electricity Markets: A framework of Peak Load Pricing with strategic firms

Gregor Zoettl
University of Cologne, Working Paper Series in Economics No. 38, 2008

Keywords: Investment Decisions; Technology Choice; Restructured Electricity Markets; Peak Load Pricing; Strategic Firms

In this article we analyze firms investment incentives in liberalized electricity markets. Since electricity is economically non storable, it is optimal for firms to invest in a differentiated portfolio of technologies in order to serve strongly fluctuating demand. Prior to the Liberalization of electricity markets, for regulated monopolists, optimal investment and pricing strategies haven been analyzed in the peak load pricing literature (compare Crew and Kleindorfer (1986)). In restructured electricity markets regulated monopolistic generators have often been replaced by competing and potentially strategic firms. This article aims to respond to the changed reality and model investment decisions of strategic firms in those markets. We derive equilibrium investment for strategic firms and compare to the benchmark cases of perfect competition and monopoly outcomes. We find that strategic firms have an incentive to overinvest in base-load technologies but choose total capacities too low from a welfare point of view. By fitting the framework to a specific electricity market (Germany) we are able to empirically analyze Investment choices of strategic firms, and quantify the potential for market power and its impact on generation portfolios in restructured electricity markets in the long run.

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The Dynamic Interplay of Inequality and Trust - An Experimental Study

Ben Greiner, Axel Ockenfels, Peter Werner
University of Cologne, Working Paper Series in Economics No. 37, 2007

JEL codes: C73, C92, D63, E25, O15

Keywords: inequality; trust; growth; laboratory experiments

We study the interplay of inequality and trust in a dynamic game, where trust increases efficiency and thus allows higher growth of the experimental economy in the future. We find that trust is initially high in a treatment starting with equal endowments, but decreases over time. In a treatment with unequal endowments, trust is initially lower yet remains relatively stable. The difference seems partly due to the fact that equal start positions increase subjects’ inclination to condition their trust decisions on wealth comparisons, whereas conditional trust is much less prevalent with unequal initial endowments. As a result, with respect to efficiency, the initially more unequal economy fares worse in the short run but better in the long run, and the disparity of wealth distributions across economies mitigates over time.

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Does Laboratory Trading Mirror Behavior in Real World Markets? Fair Bargaining and Competitive Bidding on EBay

Gary E Bolton, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 36, 2007

JEL codes: C93, D44

We conducted a framed field experiment on eBay, and examined to what extent both social and competitive laboratory behavior are robust to institutionally complex real world markets with experienced traders, who selected themselves into these markets. For buyers, the data strongly confirm the dichotomy between equitable bargaining and competitive bidding predicted by social preference equilibrium and suggested by lab evidence. Importantly, reputation building on eBay cannot explain the social behavior. We also observe that the behavioral patterns in the field experiment mirror fully naturally occurring trading patterns in the market. In particular, some sellers fail to use their commitment power as predicted by theories of both selfish and social behavior, with the pattern of deviation reflecting traders’ market experience outside the experiment. These patterns further amplify the dichotomy between bilateral and competitive bidding.

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Information Value and Externalities in Reputation Building - An Experimental Study

Gary E Bolton, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 35, 2007

In sequential equilibrium theory, reputation building is independent of whether the reputation builder is matched with one long-run player or a series of short run players. We observe, however, that reputation builders are significantly more challenged by long-run players in both laboratory chain store and buyer-seller games. Reputation builder behavior is not as unpredictable as required by the mixed equilibrium strategies and so information about the reputation builder’s past behavior has more economic value than equilibrium predicts. This in turn creates more incentives for long-run players to challenge the reputation builder, because they internalize the information externalities from the continuation game.

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The Penalty-Duel and Institutional Design: Is there a Neeskens-Effect?

Wolfgang Leininger, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 34, 2007

JEL codes: D01, C72, D74, C93

We document an increase in the scoring probability from penalties in soccer, which separates the time period before 1974 significantly from that after 1976: the scoring probability increased by 11%.We explain this finding by arguing that the institution of penalty-shooting before 1974 is best described as a standard of behaviour for striker and goal-keeper, which in game-theoretic terms represents a 2x2-game. In contrast to this, after 1976 the institution of the penalty-duel is best described by a 3x3 game form constrained by certain behavioural rules. Those rules can be parameterized by a single parameter, which nevertheless allows the theoretical reproduction (and hence explanation) of all the empirically documented regularities.The scoring probability in equilibrium of the latter institution is higher than in the former one.We present historical evidence to the effect, that this change in the perception of penalty- duels (as two different games), was caused by Johan Neeskens shrewd and revolutionary penalty-taking during World-Cup 1974, when he shot a penalty in the first minute of the final between Germany and the Netherlands right into the middle of the goalmouth. (This abstract was borrowed from another version of this item.)

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The Limits of Trust in Economic Transactions - Investigations of Perfect Reputation Systems

Gary E Bolton, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 33, 2007

JEL codes: D01, L14

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How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study

Gary E Bolton, Claudia Loebbecke, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 32, 2007

JEL codes: D44, L14

Many Internet markets rely on ‘feedback systems’, essentially social networks of reputation, to facilitate trust and trustworthiness in anonymous transactions. Market competition creates incentives that arguably may enhance or curb the effectiveness of these systems. We investigate how different forms of market competition and social reputation networks interact in a series of laboratory online markets, where sellers face a moral hazard. We find that competition in strangers networks (where market encounters are one-shot) most frequently enhances trust and trustworthiness, and always increases total gains-from-trade. One reason is that information about reputation trumps pricing in the sense that traders usually do not conduct business with someone having a bad reputation not even for a substantial price discount. We also find that a reliable reputation network can largely reduce the advantage of partners networks (where a buyer and a seller can maintain repeated exchange with each other) in promoting trust and trustworthiness if the market is sufficiently competitive. We conclude that, overall, competitive online markets have more effective social reputation networks.

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Fringe firms: Are they better off in a heterogeneous market?

Susanne Wied-Nebbeling
University of Cologne, Working Paper Series in Economics No. 31, 2007

JEL codes: L11, L13

Keywords: dominant firm; competitive fringe; price competition; heterogeneous products

This paper analyzes a market with three firms. One of them is the dominant firm and the two others are fringe firms. The formulation of demand allows a comparison between price competition with heterogeneous and homogeneous products. Because a parameterization is required to assure that market size is the same in both scenarios, no general conclusions can be drawn. But it can be shown that in large markets with relatively inelastic demand for the fringe firms’ products and a cost advantage of the dominant firm, the fringe firms are better off if they produce a heterogeneous product.

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How do coalitions get built - Evidence from an extensive form coalition game with renegotiation & externalities

Gary E Bolton, Jeannette Brosig
University of Cologne, Working Paper Series in Economics No. 30, 2007

JEL codes: C7, C9, D7

Keywords: coalitional bargaining; communication; game theory; experiment

We investigate a three-person coalition game in which one bargainer, the builder, can propose and build a coalition over two stages. In equilibrium, coalition building ends with an efficient grand coalition, while the equilibrium path is contingent on the values of the two-person coalitions and associated externality payoffs. Considering relative payoffs need not change the equilibrium path. Nevertheless, outcomes in the experiment are often inefficient. One explanation is that bargainers have difficulties anticipating the future actions of other bargainers. This problem might be mitigated by allowing bargainers to communicate prior to each stage. A test finds that communication does in fact increase efficiency, although unevenly, and at the cost of the builder. The study implies that the nature and pattern of communication among bargainers is a critical factor in efficient coalition building.

PDF How do coalitions get built - Evidence from an extensive form coalition game with renegotiation & externalities