Industrial Organization Theory and Experimental Economies

Abstract

The Introduction of laboratory experimentation in economics was motivated by theories of industrial organization and market performance. The first published market experiments were those of Edward H. Chamberlin (1948). He explored the behavioral characteristics of markets he described as being "purely" but not "perfectly" competitive and he thought that the principles of monopolistic competition would be more useful than the textbook theory of demand and supply in explaining the observed behavior. Austin C. Hoggatt (1959) and Heinz Sauermann and Reinhard Selten (1959) both focused on markets with three competitors and independently provided the first experimental evidence that the Cournot model might be a reasonably accurate description of oligopolistic behavior. Oligopoly and bilateral monopoly motivated the classic work of Lawrence E. Fouraker and Sidney Siegel (1963) which introduced several of the techniques still used today. Vernon L. Smith's (1962) sensitivity to the organization of the U.S. security industry led him to the fundamental discovery that the law of competitive demand and supply can be observed operating in an experimental environment. The field of experimental economics has experienced substantial evolution during the intervening twenty years. This paper is an attempt to provide an introduction to the methods and an assessment of available results which might now be useful to the students of industrial organization.