Industrial Organization Theory and Experimental Economics

Abstract

[Introduction] 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. The paper has six sections. Section I outlines some of the step-by-step details of laboratory procedures. Sections II through IV summarize experimental results. In Section II markets with several participants are analyzed and compared to a competitive model. Section III summarizes monopoly results. Section IV, which is the longest, deals with oligopoly. This organization of the material is natural from the point of view of traditional theory, but the organization is not necessarily natural from the point of view of results.

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