Transcript A Best Guess Game - University of East Anglia

Experimental Economics
As a Research Tool for
Competition Economics
Professor Daniel J. Zizzo
University of East Anglia
[email protected]
http://www.uea.ac.uk/~ec601/
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What Does It Mean To Run an Experiment?
• Experimental participants make decisions on paper
or on computer terminals
• Decisions have relevance to their own monetary
earnings and possibly those of others: they are
economic decisions
• Research question is of interest to economics, e.g.
competition economics
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Examples
• Experimental economics as a method has been
applied to most areas of competition & industrial
economics, e.g.:
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Competition, market power and market structure
Auction design
Collusion, cartels and leniency programmes
Predatory pricing, price discrimination
Vertical restraints and market foreclosure
Market contestability
Patent races and R&D races
Antitrust Logit Model for mergers by U.S. Department of
Justice (Werden and Froeb, 1994)
– …and so on…
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Internal vs External Validity
• Internal validity (iv):
– “in an internally valid study, the researcher feels confident
that the results, as measured by the dependent variable,
are directly associated with the independent variable and
not the result of some other, uncontrolled factor”
(Goodwin, 1995, p. 145)
• External validity (ev):
– “ability to generalize from the research context to the
settings that the research is intended to approximate”
(Loewenstein, 1999, p. F26)
Experiments
Field data
Internal Validity
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X
External Validity
X
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Internal Validity
• Subject goes to the lab, sits at a (computer or
plain) desk and receives a set of instructions
and possibly practice for the decision task
– Monetary payments that are a function of the
experimental task…
– …and other usual experimental tools such as the
lack of deception (Hertwig and Ortmann, 2001)…
– …are used to ensure a direct and salient
connection between decisions taken and desired
monetary outcome
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Internal Validity
• As a result, the experimenter has (almost total)
control on the microeconomic system the subject
operates within (Smith, 1976)
• Therefore:
– One can have a clear test of economic models by exactly
identifying and applying the conditions under which they
apply…
– …and a clear test of their robustness by relaxing
assumptions one at a time – e.g. how few firms do you
need to get to a perfectly competitive market outcome in a
double auction?
– More generally, by manipulating a single variable, one can
analyse its impact on outcomes and thus establish causal
links
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Internal Validity
• A good experiment is like a
good economic model: it is
transparent, interpretable
• Conversely, real world data
on industrial economics
tends to be murkier, less
controlled…
• …even when it can be
obtained, which often it
cannot (antitrust & sample
selection issues, difficulty of
identifying informational
assumptions, etc.)
Clear as mud
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External Validity
• What does an experiment teach us about the
real world?
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External Validity
• What is it that makes, in any particular
case, the experimental lab different from
the real world?
• Generic claims that they are inadequate are
not sufficient
– they boil down to Duhem-Quine thesis on the
limitations of induction
• impossibility of supporting or falsifying a theory by
suitable revision of the auxiliary hypotheses on the
basis of which results can be interpreted as a test of
the theory
• virtual empirical nihilism, applicable to any inductive
process – including inference from field data
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External Validity
• Specific claims are necessary:
– “an honest skeptic then has the burden of stating
what is different about the outside world that
might change results obtained in the laboratory”
(Friedman and Sunder, 1994)
• Examples of common
criticisms for competition experiments:
– Artificial tasks
– Unrepresentative
subject pools
– Companies, not individuals
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External Validity
• Practical solutions to external validity problem of
experiment E1:
– Experimental evidence in parallel to field data (FD)
– Field experiments (example: Lyons, Menzies and Zizzo’s
ongoing study of decision making by competition
authorities in merger decisions, run together with controlled
laboratory experiment with students)
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External Validity
• Practical solutions:
– Running additional experiments controlling for relevant
factor
– Duhem-Quine logic: list could be infinite…
– …but in practice list of reasonable factors will typically be
finite
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Conclusions
• Experimental research is used in all kinds of areas
of competition economics
• We have given a brief primer on experimental
methodology: think of experiments as economic
models and ways of collecting data
• As any research method, experimental economics
has strengths and limitations
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Want to Know More?
• Normann, H.T. (2006), Experimental Economics for
Antitrust Law and Policy, SSRN working paper
(http://ssrn.com/abstract=950206), forthcoming in
W.D. Collins (ed.), Issues in Competition Law and
Policy, American Bar Association
• Holt, C.A. (1995), Industrial Organization: A Survey
of Laboratory Research, in J.H. Kagel and A.E. Roth
(eds.), The Handbook of Experimental Economics,
Princeton University Press, 349-443
• For more general references on experimental
economics, see my website
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