Experimental studies of arbitration mechanism and two-sided markets

Daniel M Nedelescu, Purdue University

Abstract

This dissertation consists of three essays. The first essay is an experimental study that examines a relative new type of arbitration called &agr;-Final Offer Arbitration. The second is a theoretical study that introduces inequality aversion as a new explanatory factor for low agreements rates during disputes under arbitration mechanism. The final essay analyzes the effects of different polices on the price stricter in a two-sided market monopoly. Promising results to improve arbitration used in the field are obtained from Amended Final Offer Arbitration (AFOA), which outperforms Final-Offer Arbitration (FOA) and weakly outperforms Conventional Arbitration (CA). The first essay presents an experiment to evaluate a more general case of AFOA, &agr;-Final Offer Arbitration (&agr;-FOA). This mechanism is similar to a second-price auction, which punishes the loser with a value proportional (&agr;) to the difference between her final offer and the arbitrator's fair settlement. The experiment furthermore divides the pool of subjects within a session into two groups according to their estimated risk preferences in order to assess how the contract zone depends on the relative risk preferences of the subjects involved in negotiation. Although agreement rates overall are low, the results show that &agr;-FOA has a significantly higher agreement rate than both CA and FOA. Contrary to theoretical prediction the more risk-averse group of subjects does not have a higher agreement rate than the less risk-averse group of subjects. The second essay proposes an as yet unstudied factor to explain disagreements between disputants under &agr;-Final Offer Arbitration and Conventional Arbitration. Using a utility function proposed by Fehr & Schmidt (1999) that includes inequality aversion, the model predicts that two risk-neutral disputants will not reach an agreement if one of them has positively biased beliefs about the size of the pie. The third essay investigates the effects of different policies on price structure and consumer surplus in a two-sided market monopoly. In a laboratory environment, most of the monopolists charge a price below cost even if there is no threat of new competitors. A policy that imposes that the monopolist must charge the same price for both sides of the market decreases the total consumer surplus, while a policy that imposes that prices must be above costs decreases the total consumer surplus even more. A tax that increases the cost on one side of the market leads to a decrease in the price that monopolist charges on the other side of the market. These results suggest that the policymakers should distinguish between a one-sided and a two-sided market before they impose different policies.

Degree

Ph.D.

Advisors

Cason, Purdue University.

Subject Area

Economics

COinS