Is Competition Fair? an Experimental Study

Abstract: Is competition perceived as a fair mechanism? We report data from laboratory experiments where a powerful buyer can trade with one of several sellers. Sellers who feel shortchanged can engage in counterproductive behavior to punish the buyer. We find that the same unfavorable terms of trade 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 results demonstrate the importance of understanding not only the allocative properties of mechanisms that are used to coordinate economic activity but also the behavioral reactions to the resulting outcomes in order to understand their overall efficiency.