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Fairness, Errors and the Power of Competition


Fischbacher, Urs; Fong, Christina M; Fehr, Ernst (2003). Fairness, Errors and the Power of Competition. Working paper series / Institute for Empirical Research in Economics No. 133, University of Zurich.

Abstract

One of the most basic questions in economics concerns the effects of competition onnmarket prices. We show that the neglect of both fairness concerns and decision errors prevents ansatisfactory understanding of how competition affects prices. We conducted experiments whichndemonstrate that the introduction of even a very small amount of competition to a bilateralnexchange situation - by adding just one competitor - induces large behavioral changes amongnbuyers and sellers, causing large changes in market prices. Models that assume that all people arenself-interested and fully rational fail to explain these changes satisfactorily. In contrast, a modelnthat combines heterogeneous fairness concerns with decision errors predicts all comparative staticneffects of changes in competition correctly. Moreover, the combined model enables us to predictnthe entire distribution of prices in many different competitive situations remarkably well.

One of the most basic questions in economics concerns the effects of competition onnmarket prices. We show that the neglect of both fairness concerns and decision errors prevents ansatisfactory understanding of how competition affects prices. We conducted experiments whichndemonstrate that the introduction of even a very small amount of competition to a bilateralnexchange situation - by adding just one competitor - induces large behavioral changes amongnbuyers and sellers, causing large changes in market prices. Models that assume that all people arenself-interested and fully rational fail to explain these changes satisfactorily. In contrast, a modelnthat combines heterogeneous fairness concerns with decision errors predicts all comparative staticneffects of changes in competition correctly. Moreover, the combined model enables us to predictnthe entire distribution of prices in many different competitive situations remarkably well.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:December 2003
Deposited On:29 Nov 2011 21:25
Last Modified:05 Apr 2016 15:10
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html
Permanent URL: https://doi.org/10.5167/uzh-52032

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