INSEAD Library

Includes bibliographical references and index

Digitized

Markets, Games and Strategic Behavior Contents part 1 · Basic Concepts: Decisions, Game Theory, and Market Equilibrium 1 · chapter 1 Introduction 3 1.1 Origins 3 1.2 Overview 5 1.3 Methodology 8 1.4 A Brief History of Experimental Economics Questions 18 16 · chapter 2 A Pit Market 21 2.1 A Simple Example 21 2.2 A Classroom Experiment 22 2.3 Chamberlin's Results and Vernon Smith's Reaction 2.4 Extensions 31 Questions 32 27 · chapter 3 Some Simple Games: Competition, Coordination, and Guessing 35 3.1 Game Theory and the Prisoner's Dilemma 3.2 A Prisoner's Dilemma Experiment 37 3.3 A Coordination Game 40 3.4 A Guessing Game 42 3.5 Extensions 44 Questions 45 35 · chapter 4 Risk and Decision Making 47 4.1 Who Wants to Be a Millionaire? 47 4.2 A Simple Lottery-Choice Experiment 50 4.3 Payoff Scale, Order, and Demographics Effects 54 4.4 Extensions 58 Questions 58 xii Markets, Games, and Strategic Behavior · chapter 5 Randomized Strategies 59 5.1 Symmetric Matching Pennies Games 59 5.2 Battle of the Sexes 63 5.3 Extensions 67 Questions 67 part 2 · Market Experiments 69 · chapter 6 Monopoly and Cournot Markets 71 6.1 Monopoly 71 6.2 Cournot Duopoly 75 6.3 Cournot Oligopoly 77 6.4 Extensions 80 Appendix: Optional Quick Calculus Review Questions 81 80 · chapter 7 Vertical Market Relationships 7.1 Double Marginalization 7.2 The Newsvendor Problem 7.3 The Bullwhip Effect 90 7.4 Extensions 92 Questions 93 83 87 83 · chapter 8 Market Institutions and Power 95 8.1 Introduction 95 8.2 The Exercise of Seller Market Power without Explicit Collusion 8.3 Edgeworth Cycles and Random Prices 102 8.4 The Effects of Market Power 103 8.5 Extensions 107 Appendix: Calculation of a Mixed-Strategy Equilibrium in Prices Questions 109 99 107 · chapter 9 Collusion and Price Competition 111 117 9.1 Collusion in Posted-Offer Markets: "This Is Economics" 111 9.2 Collusion with Secret Discounts 114 9.3 Extensions: Cheap Talk, Mutual Forbearance, and the "V Word" Questions 120 · chapter 10 Market Failure Due to Unraveling: Lemons and Matching Markets 123 10.1 Endogenous Product Quality 123 Contents 10.2 Clearinghouse Mechanisms and Unraveling in Labor Markets 127 10.3 Extensions: Baseball, Dorm Rooms, School Choice, Deep Space,Sorority Rush, ... but Marriage? 131 Questions 131 xiii · chapter 11 Asset Markets and Price Bubbles 133 11.1 Bubbles and Crashes 133 11.2 A Digression on Present Value 137 11.3 The Limit Order Market Experiment 138 11.4 Other Research on the Call Market Institution Questions 143 141 part 3 · Bargaining and Behavioral Labor Economics 145 · chapter 12 Ultimatum Bargaining 147 12.1 Strategic Advantage and Ultimatums 147 12.2 Bargaining in the Bush 148 12.3 Bargaining in the Lab 151 12.4 Multi-Stage Bargaining 153 12.5 Extensions: "I Will Be Spending Years Trying to Figure Out What This All Meant." 156 Questions 157 · chapter 13 Trust, Reciprocity, and Principal-Agent Games 159 13.1 The Trust Game 159 13.2 A Labor Market Reciprocity Game 13.4 Extensions: Field Experiments Questions 165 162 164 part 4 · Public Choice 167 · chapter 14 Voluntary Contributions 169 171 14.1 Social Norms and Public Goods 169 14.2 "Economists Free-Ride, Does Anyone Else?" 14.3 Single-Round Experiments 172 14.4 Multi-Round Experiments 176 14.5 Extensions 178 Questions 180 · chapter 15 The Volunteer's Dilemma 183 15.1 Sometimes It Only Takes One Hero 15.2 Initial Experimental Evidence 184 183 xiv Markets, Games, and Strategic Behavior 15.3 The Mixed-Strategy Equilibrium 15.4 An Experiment on Group Size Effects 15.5 Extensions 191 Questions 191 186 189 · chapter 16 Externalities, Congestion, and Common Pool Resources 193 16.1 Water 194 16.2 Ducks and Traffic 16.3 Fish 200 16.4 Extensions 202 Questions 203 195 · chapter 17 Rent Seeking 205 17.1 Government with "a Smokestack on Its Back" 17.2 Rent Seeking in the Classroom Laboratory 17.3 The Nash Equilibrium 208 205 207 17.4 Comparative Statics for Changes in Cost and the Number of Competitors 209 17.5 Extensions 210 Questions 212 · chapter 18 Voting and Politics Experiments 215 18.1 The Median Voter Theorem 215 18.2 Experimental Tests of Spatial Voting Models 18.3 Fairness and Deviations from Core Outcomes 220 18.4 Legislative Bargaining 221 18.5 Agendas and Strategic Voting 222 18.6 Polls, Runoffs, and Other Coordinating Devices 18.7 Participation Games 225 18.8 Field Experiments 227 18.9 Extensions 228 Questions 229 217 224 part 5 Auctions 231 · chapter 19 Private Value Auctions 233 19.1 Introduction 233 19.2 Auctions: Up, Down, and the "Little Magical Elf" 19.3 Bidding against a Uniform Distribution 237 19.4 Bidding Behavior in a Two-Person, First-Price Auction 19.5 Extensions 242 Appendix: Risk Aversion 244 Questions 246 234 240 Contents xv · chapter 20 The Takeover Game 247 20.1 Wall Street (the Film) 247 20.2 A Takeover Game Experiment 248 20.3 Quality Unraveling 250 20.4 Extensions: The Loser's Curse 252 Questions 252 · chapter 21 Common-Value Auctions and the Winner's Curse 255 21.1 "I Won the Auction but I Wish I Hadn't" 21.2 The Nash Equilibrium 258 21.3 The Winner's Curse 261 21.4 Extensions 262 Questions 263 255 · chapter 22 Multi-Unit and Combinatorial Auctions 265 22.1 Dry 2K 265 22.2 FCC Bandwidth Auctions and Package Bidding Alternatives 22.3 Experimental Tests of Package Bidding Alternatives 22.4 Extensions 278 Questions 279 272 276 part 6 · Behavioral Game Theory: Treasures and Intuitive Contradictions 281 · chapter 23 Multi-Stage Games 285 23.1 Extensive Forms and Strategies 23.2 Two-Stage Trust Games 288 23.3 The Centipede Game 291 23.4 Extensions 292 Questions 293 285 · chapter 24 Generalized Matching Pennies 295 24.1 The Case of Balanced Payoffs 295 24.2 Noisy Best Responses 296 24.3 The Effects of Payoff Imbalances 299 24.4 Probabilistic Choice 302 24.5 Extensions 304 Questions 305 · chapter 25 The Traveler's Dilemma 307 25.1 A Vacation with an Unhappy Ending? 307 xvi Markets, Games, and Strategic Behavior 25.2 Data 309 25.3 Learning and Experience 310 25.4 Iterated Rationality and Quantal Response Equilibrium 25.5 Extensions 316 Appendix: Bounded Rationality in the Traveler's Dilemma-- A Spreadsheet-Based Analysis 318 Questions 323 312 · chapter 26 Coordination Games 325 26.1 "The Minimum Effort Game? That's One I Can Play!" 325 26.2 Nash Equilibria, Numbers Effects, and Experimental Evidence 26.3 Effort-Cost Effects 329 26.4 Equilibrium with Noisy Behavior 331 26.5 Extensions 333 Appendix: An Analysis of Noisy Behavior in the Coordination Game 334 Questions 337 328 part 7 · Individual Decision Experiments 339 · chapter 27 Probability Matching 341 27.1 Being Treated Like a Rat 341 27.2 Are Rats Really More Rational Than Humans? 342 27.3 Siegel and Goldstein's Experiments 343 27.4 A Simple Model of Belief Learning 345 27.5 Reinforcement Learning 346 27.6 Extensions 347 Questions 348 · chapter 28 Lottery Choice Anomalies 351 28.1 Introduction 351 28.2 The Allais Paradox 352 28.3 Prospect Theory: Probability Misperception 354 28.4 Prospect Theory: Gains, Losses, and "Reflection Effects" 28.5 Extensions 359 Questions 360 356 · chapter 29 ISO (in Search of ...) 361 362 29.1 Introduction 361 29.2 Search from a Uniform Distribution 29.3 Experimental Data 363 29.4 Optimal Search 364 29.5 Extensions 366 Questions 367 Contents xvii part 8 n Information, Learning, and Signaling 369 · chapter 30 Bayes' Rule 371 30.1 Introduction 371 30.2 A Simple Example and a Counting Heuristic 373 30.3 Relating the Counting Heuristic to Bayes' Rule 376 30.4 Experimental Results 378 30.5 Bayes' Rule with Elicited Probabilities 379 30.6 A Follow-Up Experiment with a Rare Event 382 30.7 Extensions 383 Appendix: Truthful Elicitation 384 Questions 385 · chapter 31 Information Cascades 389 31.1 "To Do Exactly as Your Neighbors Do Is the Only Sensible Rule." 31.2 A Model of Rational Learning from Others' Decisions 390 31.3 Experimental Evidence 392 31.4 Extensions 395 Questions 396 389 · chapter 32 Statistical Discrimination 397 32.1 "Brown-Eyed People Are More Civilized" 397 32.2 Being Purple or Green 399 32.3 Data on Statistical Discrimination 401 32.4 "Are Emily and Greg More Employable than Lakisha and Jamal?" 32.5 Extensions 406 Appendix: Derivation of the Discriminatory Equilibrium 407 Questions 408 405 · chapter 33 Signaling Games 409 33.1 Real Men Don't Eat Quiche 409 33.2 Separating Equilibria 410 33.3 Pooling 412 33.4 Unintuitive Beliefs and Reverse Type Dependence 33.5 "Stripped Down Poker" 416 33.6 Extensions: "Too Cool for School" 419 Questions 420 413 · chapter 34 Prediction Markets 423 34.1 The Rationale for Prediction Markets 423 34.2 The Success of Political Event Markets 426 34.3 Information Aggregation and "Common Value Trading" 34.4 Extensions 431 Questions 431 428 xviii Markets, Games, and Strategic Behavior · References 433 · Index 451 · Class Experiments Instructions CE-1 chapter 2 · Pit Market CE-3 chapter 3 · Push-Pull CE-7 chapter 4 · Lottery Choice CE-11 chapter 5 · Battle of Colors CE-15 chapter 6 · Quantity Choice Market CE-19 chapter 10 · Price/Quality Market CE-23 chapter 12 · Bargaining CE-27 chapter 14 · Play-or-Keep CE-31 chapter 15 · Volunteer's Dilemma Game CE-33 chapter 17 · Lobbying Game CE-35 chapter 19 · Private Value Auction CE-39 chapter 20 · Takeover Game CE-43 chapter 21 · Common Value Auction CE-47 chapter 22 · Multi-Unit Auction CE-51 chapter 25 · Claim Game CE-55 chapter 26 · Effort Game CE-59 chapter 27 · Binary Prediction Game CE-63 chapter 28 · Paired Lottery Choices CE-67 chapter 29 · Search Game CE-71 chapter 30 · Bayes' Rule CE-75