Stackelberg in the lab: The effect of group decision making and “Cooling-off” periods

The Stackelberg duopoly is a fundamental model of sequential output competition. The equilibrium outcome of the model results in a first-mover advantage where the first-moving firm produces more output, and earns larger profits, relative to the second-moving firm. Huck et al., 2001 and Huck and Wallace, 2002 test the Stackelberg duopoly in a lab setting and find that behavior is largely inconsistent with the equilibrium predictions of the model. We hypothesize that this inconsistency is a result of differences between the decision making environment implemented in the lab and firm environments in the field. In this paper, we experimentally investigate whether group decision making and a decision “cooling-off” period lead to more profit maximizing Stackelberg behavior in the lab. Specifically, we re-test the Stackelberg duopoly in the lab while implementing (i) two-person decision making groups, and (ii) a 10-min cooling-off period for second movers. In line with the previous studies, we find that second-mover response behavior is largely inconsistent with profit maximization. Furthermore, the implementation of groups and a cooling-off period has little effect on second-mover behavior. However, we find that group first-movers choose significantly lower output levels than individuals. While further from the equilibrium prediction, we show that these lower output choices by groups are more in-line with profit maximizing behavior, conditional on the non-profit maximizing response behavior of second-movers.

► Experimentally investigate group decision making and cooling-off periods in a Stackelberg duopoly.
► Across all treatments, second-mover behavior is inconsistent with profit maximization.
► Neither groups or a cooling-off period leads to more profit maximizing behavior of second-movers.
► Group first-movers choose significantly lower output levels, relative to individuals.
► Conditional on second-mover responses, group first-mover output choices are more in line with profit maximization.