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Does competition justify inequality?


Bartling, Björn; Grieder, Manuel; Zehnder, Christian (2015). Does competition justify inequality? Working paper series / Department of Economics 158, University of Zurich.

Abstract

Are competitive mechanisms perceived as just sources of economic inequality? Perceptions of fairness violations can have severe economic consequences, as they may cause counterproductive behavior such as rulebook slowdowns or quality shading. To analyze fairness perceptions associated with competitive mechanisms, we run laboratory experiments where a single powerful buyer can trade with one of several sellers—an environment that can lead to pronounced inequality among the interacting parties. Once the terms of trade are determined, sellers can engage in counterproductive behavior. We robustly find that low procurement prices, which allocate most of the surplus from trade to the buyer, trigger significantly less counterproductive behavior if the buyer uses a competitive auction to determine the terms of trade than if he uses his price setting power to dictate the same terms directly. Our data demonstrate that competitive mechanisms, in addition to their capability to produce efficient allocations, can reduce conflict and inefficient reactions by increasing justification for economic inequality.

Abstract

Are competitive mechanisms perceived as just sources of economic inequality? Perceptions of fairness violations can have severe economic consequences, as they may cause counterproductive behavior such as rulebook slowdowns or quality shading. To analyze fairness perceptions associated with competitive mechanisms, we run laboratory experiments where a single powerful buyer can trade with one of several sellers—an environment that can lead to pronounced inequality among the interacting parties. Once the terms of trade are determined, sellers can engage in counterproductive behavior. We robustly find that low procurement prices, which allocate most of the surplus from trade to the buyer, trigger significantly less counterproductive behavior if the buyer uses a competitive auction to determine the terms of trade than if he uses his price setting power to dictate the same terms directly. Our data demonstrate that competitive mechanisms, in addition to their capability to produce efficient allocations, can reduce conflict and inefficient reactions by increasing justification for economic inequality.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C91, D31, D63, P10
Uncontrolled Keywords:Fairness, competition, markets, efficiency, inequality
Language:English
Date:November 2015
Deposited On:26 May 2014 15:14
Last Modified:15 Aug 2017 11:56
Series Name:Working paper series / Department of Economics
Number of Pages:57
ISSN:1664-7041
Additional Information:Revised version ; former title: "Let the market decide: an experimental study of competition and fairness"
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.econ.uzh.ch/static/wp/econwp158.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers-new.php

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