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Can market competition reduce anomalous behaviours

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  • Choo, Lawrence
  • Zhou, Xiaoyu

Abstract

We use an experiment to study whether market competition can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under careful conditions, market competition can indeed reduce anomalous behaviour in games.

Suggested Citation

  • Choo, Lawrence & Zhou, Xiaoyu, 2019. "Can market competition reduce anomalous behaviours," FAU Discussion Papers in Economics 08/2019, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    • Handle: RePEc:zbw:iwqwdp:082019
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    More about this item

    Keywords

    market competition; market selection hypothesis; auctions; bounded-rationality; red hat puzzle;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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