GIFT EXCHANGE AND RECIPROCITY IN COMPETITIVE EXPERIMENTAL MARKETS

One of the outstanding results of three decades of laboratory market r esearch is that under rather weak conditions prices and quantities in competitive experimental markets converge to the competitive equilibri um. Yet, the design of these experiments ruled out gift exchange or re ciprocity motives, that is, subjects could not reciprocate for a gift. This paper reports the results of experiments which do not rule out r eciprocal interactions between buyers and sellers. Sellers have the op portunity to choose quality levels which are above the levels enforcea ble by buyers. In principle they can, therefore, reward buyers who off er them high prices. Yet, such reciprocating behaviour lowers sellers' monetary payoff and is, hence, not subgame perfect. The data reveal t hat many sellers behave reciprocally. This generates a positive relati on between prices and quality at the aggregate level which is anticipa ted by the buyers. As a result, buyers are willing to pay prices which are substantially above sellers' reservation prices. These results in dicate that reciprocity motives may indeed be capable of driving a com petitive experimental market permanently away from the competitive out come. The data, therefore, support the gift exchange approach to the e xplanation of involuntary unemployment. (C) 1998 Elsevier Science B.V.