Shakun D. Mago

Facing Your Opponents: Social Identification and Information Feedback in Contests

We experimentally investigate the effect of social identification and information feedback on individual behavior in contests. Identifying subjects through photo display decreases efforts. Providing information feedback about others’ effort does not affect the aggregate effort levels but it does change the dynamics of individual behavior. We develop a behavioral model based on relative payoff maximization, and use it to estimate the degree of pro-social/status-seeking behavior. We find that decrease in ‘social distance’ between group members through photo display promotes pro-social behavior. Information feedback reduces the within-group volatility in effort level and facilitates greater adherence to the ‘group norm.’ Finally, in contrast to standard theoretical predictions, we find significant over-expenditure of efforts in all treatments. This overdissipation can be explained by a combination of non-monetary utility of winning and relative payoff maximization.

Best-of-Three Contest Experiments: Strategic Versus Psychological Momentum

We conduct an experimental analysis of a best-of-three contest. Intermediate prizes lead to higher efforts, while increasing the role of luck (as opposed to effort) leads to lower efforts. Both intermediate prizes and luck reduce the probability of contest ending in two rounds. The patterns of players’ efforts and the probability that a contest ends in two rounds are consistent with ‘strategic momentum’, i.e., momentum generated due to strategic incentives inherent in the contest. We do not find evidence for ‘psychological momentum’, i.e., momentum which emerges when winning affects players’ confidence. Similar to previous studies of contests, we find significantly higher efforts than predicted and strong heterogeneity in effort between subjects.

Best-of-Three Contests: Experimental Evidence

We conduct an experimental analysis of a best-of-three Tullock contest. Intermediate prizes lead to higher efforts, while increasing the role of luck (as opposed to effort) leads to lower efforts. Both intermediate prizes and luck reduce the probability of contest ending in two rounds. The patterns of players? efforts and the probability that a contest ends in two rounds is consistent with „strategic momentum?, i.e. momentum generated due to strategic incentives inherent in the contest. We do not find evidence for „psychological momentum?, i.e. momentum which emerges when winning affects players? confidence. Similar to previous studies of contests, we find significantly higher efforts than predicted and strong heterogeneity in effort between subjects.

Facing Your Opponents

We experimentally investigate the effect of social identification and information feedback on individual behavior in contests. In all treatments, we find significant overexpenditure of effort relative to the standard theoretical predictions. Identifying subjects through photo display decreases wasteful effort. Providing information feedback about others’ effort does not affect the aggregate effort, but it decreases the heterogeneity of effort and significantly affects the dynamics of individual behavior. A behavioral model that incorporates a nonmonetary utility of winning and relative payoff maximization explains significant overexpenditure of effort. It also suggests that decrease in “social distance” between group members through social identification promotes prosocial behavior and decreases overexpenditure of effort, while improved information feedback decreases the heterogeneity of effort.

An Experimental Examination of Competitor-Based Price Matching Guarantees

We use experimental methods to demonstrate the anti-competitive potential of price matching guarantees in both symmetric and asymmetric cost duopolies. Our findings establish that when costs are symmetric, price-matching guarantees significantly increase market prices. In markets with cost asymmetries, guaranteed prices remain high relative to prices without the use of guarantees, but the overall ability of price guarantees to act as a collusion facilitating device becomes contingent on the relative cost difference. Lesser use of guarantees, combined with lower average prices and slower convergence to the collusive level, suggest that the mere presence of cost asymmetries may curtail collusive behavior.

Costly Buyer Search in Laboratory Markets with Seller Advertising

In this experiment, sellers simultaneously choose prices and advertising strategies. Buyers either purchase at an advertised price or search sequentially for other prices. In the unique symmetric equilibrium, sellers charge a high unadvertised price or advertise a price chosen from a lower interval. Increases in search or advertising costs raise equilibrium prices and affect equilibrium advertising intensity. Empirical results are consistent with most comparative static predictions. Sellers, however, price much lower and advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium with significant seller market power.

New Hampshire Effect: behavior in sequential and simultaneous multi-battle contests

Sequential multi-battle contests are predicted to induce lower expenditure than simultaneous contests. This prediction is a result of a “New Hampshire Effect”—a strategic advantage created by the winner of the first battle. Although our laboratory study provides evidence for the New Hampshire Effect, we find that sequential contests generate significantly higher (not lower) expenditure than simultaneous contests. This is mainly because in sequential contests, there is significant over-expenditure in all battles. We suggest sunk cost fallacy and utility of winning as two complementary explanations for this behavior and provide supporting evidence.