Discussion Paper No. 514

THE OUTSIDER AND SUNK COST
EFFECTS ON ‘DANGO’
IN PUBLIC PROCUREMENT BIDDING:
AN EXPERIMENTAL ANALYSIS
Mitsuhiro Nihashi
Tatsuyoshi Saijo
and
Masashi Une

July 2000

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

The Outsider and Sunk Cost Effects on ‘Dango’ in Public
Procurement Bidding: An Experimental Analysis ∗Mitsuhiro Nihashi†
Tatsuyoshi Saijo‡
Masashi Une#

July 1, 2000

Abstract
This paper presents the result of experiments for finding some insight into an effect of the new
bidding system in Japanese public construction works procurement on bidders’ collusion, which iscalled ‘dango’. We focused on an effect of the entry of an outsider who is not a dango member. The
main conclusion of the experiments is that an outsider, a subject who is not allowed to communicate
with other subjects, has a robust effect to prevent other subjects from colluding and to make thewinning price decrease considerably. However, we also observed that if all subjects including theoutsider had willingness to cooperate and if they could recognize it by using price signaling, they
could form tacit collusion and raise the winning price gradually. The result of the experiments
implies that a policy to help outsiders such as foreign firms to participate in the bidding may be a
crucial countermeasure against dango.

∗

This research was partially supported by the Grant in aid for General Research 04451111 of
Ministry of Education in Japan and the grant of University of Tsukuba. The authors thank Hideki
Nakamura, Takako Nakashima, Shinji Ohseto and Hidesuke Takahashi for their help. The views
expressed herein are those of the authors and not those of Bank of Japan or Chubu Electric Power
Cooperation. All materials used in the experiments are available. If you wish them, contact theauthors.

†

Chubu Electric Power Cooperation, Higashi, Nagoya, 461-8680, Japan
Institute of Social and Economic Research, Osaka University, Ibaraki, Osaka, 567-0047, Japan#
Institute for Monetary and Economic Studies, Bank of Japan, Chuo, Tokyo, 103-8660, Japan‡1. Introduction
The public construction procurement system in Japan has seriously suffered from ‘dango’,
which is collusion among firms who participate in the bidding for the public construction contract asbidders.1 Prior to the bidding, dango members decide a winner and coordinate their offer prices in a
way as to maximize their joint profits.2 As a result, dango members have obtained excess profits inthe public construction works, and Japanese taxpayers have wasted their money. McMillan (1991)
estimated that the excess profits from dango in Japanese public procurement typically amounted to
16 to 33% of the competitive price. For example, the amount of Japanese governmental investment
is 355 billion dollars in 1998.3 McMillan’s estimation indicates that the excess profits during theyear reach to 57 to 117 billion dollars.
Japanese national and local governments have generally adopted ‘the designated competitive
bidding system’ in the public construction procurement since 1900. Under this bidding system, thegovernments examine whether a firm who wants to submit a bid for the public construction works iseligible for the bidder4 and make a list of qualified firms. The firms in the list are classified into
multiple ranks according to their cost-performance. Each rank is linked to one range of a scale of the
public construction works project. At the discretion of the governments, almost 10 firms aredesignated as bidders from one rank linked to the scale of the project. 5 The winner in a first-pricesealed-offer auction with a ceiling price becomes the contractor.
Some previous studies (e.g. McMillan (1991), Woodall (1996), Saijo, Une and Yamaguchi(1996), Une and Saijo (1998)) point out that the designated competitive bidding system has several
features that make bidders easy to collude. First, all bidders’ costs are almost identical, and all
bidders can recognize the fact. The designation of qualified firms from one rank in the list allows all
bidders to know that differences of their costs of the public construction works are negligible. Using
the information of the costs, bidders may easily compute the excess profit from the bidding anddistribute it among them.6 The second is the small and fixed number of bidders. The number of1

Dango violates Section 3 of the Antimonopoly Act (Prohibition on unreasonable restraint of trade).
From 1977 to 1998, Japan Fair Trade Commission reported 130 cases of dango in the public procurement(Japan Fair Trade Commission (1999)).
2
Various kinds of the price coordination rules by dango have been reported (e.g., McMillan (1991)). The
most popular one is that the winner is simply allocated by turn. An alternative rule is that the winner isallocated according to the number of times in the past the firm has participated in the bidding and the sizeof the firm’s bid on the occasions it won a contract in the past.
3
This number is calculated by using 111.3 yen per dollar, the average exchange rate during 1998.
4
The governments judge the eligibility by considering each firm’s history of contracts for Japanese publicconstruction works, the number of years of experience in Japanese private construction market, locationof the headquarters, sales, profit, capital asset, the number of employees and so on.
5This means that top-class firms who have the highest cost-performance are not designated as bidders forthe small or middle scale projects. Takeda (1994) analyses that this manner may be a kind of an industrial
policy to protect small construction firms by preventing higher cost-performance firms from winning inall bids for the public procurement.
6
We consider a bidder’s cost as the private value. However, it may be possible to assume that the cost1

bidders the governments designate is fixed at about 10. This reduces conspiratorial transaction costs
needed for communication.7 Third, for foreign construction firms (i.e., outsiders against dango
members), it is very difficult to obtain the eligibility for the bidders. This is because theirconstruction works in the past and their numbers of years of experience in Japan are considered as
crucial factors in the examination process (Hashimoto (1988)). Fourth, each bidder can identify theothers prior to the bidding because the governments usually gather all bidders in a room and hold ameeting to explain a construction works project. Fifth, the governments disclose the winner’s nameand the winning price after deciding the winner. This procedure may allow dango members tomonitor whether other members follow the agreement.8 The sixth is the need of a guarantee for the
public construction procurement contract. In order to contract with the governments for the public
procurement, the winning firm has to find other designated firms who guarantee to complete theconstruction works. If a defector who is one of dango members win in the bidding, the other dango
members can refuse defector’s request for becoming the guarantee and prevent the defector’scompletion of the contract. The guarantee procedure may provide a way to punish defectors andneutralize the incentive of dango members to break the agreement (The Society for the Study ofPractice of the Public Works Contract System (1999)).9
In January 1994, for the purpose of enhancing price competition among bidders, Ministry ofConstruction introduced a new bidding system, ‘the limited general competitive bidding system,’ inthe extremely large-scale public construction works.10 The differences between the designatedcompetitive bidding system (the old bidding system) and the limited general competitive bidding
system (the new bidding system) are summarized in Table 1. First, the new bidding system prohibits
the governments from designating bidders and enables all firms who fulfill certain requirements forthe eligibility to participate in the bidding. As a result, it is said that the differences of costperformance among bidders are magnified and that the number of bidders increases in the actual
bidding.11 These factors may make costs of the conspiratorial negotiation and communication among

consists of common and private parts. As suggested by McAfee and McMillan (1992), the analysis basedon the private-value model can be also applied in this case.
7
In addition, the designation right is said to be the resource of illegal relationship between officials of thegovernments and dango members. Using this resource, dango members can not only ask the officials todesignate bidders they intended, but also punish defectors by not designating them in the following
bidding. This is considered to be one of factors that strengthen dango (e.g., McMillan (1992), Woodall(1996)).
8
Some experimental result (e.g., Davis and Holt (1998)) reported that capability of monitoring othersellers’ actions facilitated explicit price-fixing conspiracy among sellers in the posted-offer auction.
9
As is well known, the existence of dango is also attributed to some aspects of the structure of theJapanese construction industry and the relationship between construction firms and politicians (McMillan(1991), Woodall (1996)). In this paper, we focus on the aspects of the bidding system only.
10
The national and local governments have to adopt the new bidding system in the public construction
works whose cost amounts to more than 6 million and 21 million dollars, respectively. In the smaller scale
projects, the designated competitive bidding system is adopted continuously.
11
For example, Chubu Regional Construction Bureau, Ministry of Construction adopted the new bidding

2

bidders increase. Second, the entry of foreign firms into the bidding becomes easier. In the new
bidding system, requirements for the eligibility were established in a way that foreign firms were notbehind Japanese firms in participating in the bidding.12 Third, it is more difficult for each bidder to
identify other bidders. The governments are prohibited from holding the meeting in which all
bidders can identify who participate in the bidding. This suggests that bidders need an additional costin order to find who will submit bids prior to the bidding. Fourth, the guarantee system for the publicconstruction procurement contract by other designated firms is also prohibited. This may weaken thepunishment effect of refusing the defector’s request for becoming the guarantee.
Table 1: The Differences between the Old and the New Bidding Systems

Designation of bidders by the governments
Differences of cost-performance among bidders
The number of bidders predicted
Entry of foreign firms into the bidding
Identification of all bidders prior to the bidding
Information of the winner and the winning priceThe guarantee system of completion of theconstruction works by other bidders

The old bidding
systemMandatory
Negligible
About 10More difficult thanJapanese firms
Easy
Disclosed
Mandatory

The new bidding
systemProhibited
Magnified
70 to 80
Same conditions asJapanese firms
DifficultDisclosed
Prohibited

It is said that introducing the new bidding system can make it more difficult for bidders to makeand maintain dango. Is the hypothesis really true? The theoretical and empirical studies that examine
it have not been reported as far as we are aware. 13 It is hard to obtain empirical data regarding dango
processes and outcomes since it is illegal. In such a case, the experimental approach provides aninteresting opportunity to examine the effects. As an earlier experimental study, Une and Saijo(1998) designed experiments to examine effects of the following two factors on the winning priceand bidders’ behavior: (i) an increase in the number of bidders, and (ii) the entry of a low cost bidder
who had an incentive to break dango. These factors were prepared to examine an impact ofprohibition of the designation by the governments. All bidders were allowed to communicate faceto-face with each other. They observed following two important facts. The first is that when all
bidders had the same cost, an increase in the number of bidders from 3 to 12 did not significantly
system on a contract for construction of a bridge in Shizuoka City at November 15, 1993. In this bidding,the number of bidders increased from 10 to 21 (Asahi Shinbun (1993)). Ministry of Construction predicts
that the number of bidders in the bidding for the national construction works project increases to a
maximum of 80 (The Society for the Study of Practice of the Public Works Contract System (1999)).
12
For foreign firms, each firm’s history of previous contracts for the public construction works and thenumber of years of experience not only in Japan but in foreign countries are evaluated in the examination
process (The Society for the Study of the Bidding for the Public Construction Works (1999)).
13
The only related information we can obtain is the unofficial comment by officials of Ministry ofConstruction. Asahi Shinbun (1994) reported that they stated that the contract prices of 25 public works
projects under the new bidding system decreased 3 percent on average in September 1994.

3

make the winning price decrease. As a result, the winning price was very close to the ceiling price.
The second is that 3 of 5 low cost bidders cooperated with other bidders even though they could
surely obtain more profits by defection than by cooperation. The winning price did not decrease
considerably. They concluded that both factors were ineffective under the situation in which all
bidders were allowed to communicate face-to-face with each other.
The main question posed here is whether the entry of outsiders into the bidding has an effect tobreak collusion among bidders and to make the winning price decrease considerably. This paper
reports a series of laboratory experiments that examine the impact in order to provide some insight
into the effect of the new bidding system. We separated 4 subjects (bidders) into 2 groups: one
consisted of 3 subjects who were allowed to communicate face-to-face with each other and the otherconsisted of one subject (i.e., an outsider). Communication between groups was not allowed. Eachsubject was not informed of the number of all subjects. Under the setting, we conducted the firstprice sealed-offer auction with sequential 27 periods. We observed the following conclusions. First,
the outsider has a strong effect to prevent subjects from colluding and to make the winning pricedecrease to near the subgame perfect equilibrium price. Second, if all subjects including the outsider
have willingness to cooperate and if they can recognize it by using price signaling, they can form
tacit collusion and raise the winning price gradually. In addition, we prepared experiments with asunk cost that losers have to pay to the experimenters in order to mimic the real situation. From theresult of the experiments, we obtained the following third conclusion: although the sunk cost has aneffect to strengthen subjects’ incentive to defect from collusion through their expectation of the endof the session, the impact is restrictive and does not make the winning price decrease.
The remainder of the paper is organized as follows. Section 2 describes the first-price sealedoffer auctions designed to determine if the entry of an outsider prevents collusion. Section 4 reports
the results, and Section 5 discusses the implication of the results and possible future researches.

2. Experimental design
2.1 Characteristics and information conditions in the experiments
In order to focus on the impact of the entry of an outsider, we designed the experiments in sucha way not only as to mimic the actual bidding system but also as to simplify the content andprocedure as much as possible. We adopted the first-price sealed-offer auction with the following 2
parameters. First, we prepared a parameter of whether subjects were divided into 2 groups or not. In
the sessions with two groups, one group consisted of 3 subjects, and the other consisted of one
subject. These groups were in separate rooms. While subjects in the same room were allowed tocommunicate face-to-face with each other, communication between two groups was not allowed. We
considered the subject who was not allowed to communicate with the other 3 subjects as an outsider.
The second parameter is whether losing subjects pay a fee to the experimenters or not. This4

parameter was introduced in order to add an actual aspect of the bidding in the public construction
works. In the real situation, it takes various costs for each bidder to prepare for participation in thebidding, e.g., collection of the bidding information, investigation of the public construction works
projects, computation of the offer price. If a bidder loses in the bidding, it has to bear the costs
without compensation. This is why we use a word of ‘the sunk cost’ in this paper. Since the sunkcost makes the expected profit smaller, we can observe the effect on the winning price and subjects’
behavior. We set –7 as the sunk cost in order to minimize the positive expected profit per period bycooperation with other subjects.14 In the experiments with the sunk cost, loser’s profit in the period
was -7.

Table 2: 4 Treatments of the Experiments
Treatments
No-Outsider/No-Cost
Outsider/No-Cost
No-Outsider/Cost
Outsider/Cost

The numberof sessions
55
5
5The numberof periods
27
27
27
27

The numberof bidders
34
3
4The numberof outsiders
01
01

The sunk
cost
No
No
Yes
Yes

Our experiments consisted of 4 treatments as shown in Table 2. Commonly in all treatments, thenumbers of sessions was 5. Each session consisted of 27 periods. The numbers of subjects in thesessions with and without an outsider were 4 and 3, respectively.15 Subjects in the same room wereallowed to communicate face-to-face with each other in 3 minutes prior to submitting their bids. We
assigned all subjects the same unit cost. Although, under the new bidding system, the differences ofunit costs among bidders are considered to be magnified, we adopted this setting in order to focus on
the effect of the entry of the outsider by simplifying the experimental design.16
We designed the following five information conditions on the basis of the actual situation under
the new bidding system. First, although subjects were informed of a fact that a final period of theexperiments had already been determined, they were not informed of the exact number of periods inall treatments.17 In the real situation, while all bidders recognize that a series of the bidding with the14

Since there is no reference data of the cost for computing the offer price, we set the sunk cost as –7
assuming an extreme case in the experiments. The size of the sunk cost may have an impact on thesubjects’ behavior. The further research is needed to examine this effect precisely.
15
The difference of the total number of subjects between the treatments with and without an outsider may
make an effect somewhat on the winning price and their behavior. However, as suggested by Une andSaijo (1998), the effect is considered to be negligible.
16
With regard to the cost structure, Une and Saijo (1998) already conducted the experiments in which
there was a difference of unit costs among subjects. They concluded that it did not have an effect to makethe winning price decrease considerably.
17
We instructed subjects about the number of periods as follows: “The experiment will continue until theexperimenters say that the experiment has ended. We don’t inform you of the number of periods although
it has been predetermined.” This is the same situation as Isaac and Walker (1985) and Une and Saijo(1998).

5

same bidders comes to an end some day, no one knows the exact number of the bidding in advance.
Second, following an ordinary manner under the Japanese public bidding system, the experimenters
did not disclose the losers’ offer prices in all treatments. Third, in the sessions with an outsider (theOutsider/No-Cost and Outsider/Cost sessions), the number of subjects were not disclosed to subjects
in all treatments. As stated in the previous section, the entry of outsiders makes it more difficult foreach bidder to completely identify who will participate in the bidding under the new bidding system.
Fourth, the ceiling price assigned by the experimenters was open to all subjects. The ceiling price thegovernments computed is officially confidential. However, since the price standard of construction
materials the governments use is disclosed, it is possible for bidders to predict the ceiling price. A lotof the related studies point out that the actual winning offer prices were very close to the ceiling
prices.18 Fifth, all subjects were informed that they were assigned the same unit cost by theexperimenters. We adopted this condition because of making the experiments as simple as possible.
We can examine two effects by comparing these treatments. First, we can examine the effect of
the entry of an outsider, ‘the outsider effect,’ by comparing No-Outsider/No-Cost and NoOutsider/Cost sessions with Outsider/No-Cost and Outsider/Cost sessions, respectively. Second, we
can examine the effect of the sunk cost, ‘the sunk cost effect,’ by comparing No-Outsider/No-Cost
and Outsider/No-Cost sessions with No-Outsider/Cost and Outsider/Cost sessions, respectively.

2.2 Procedural details
Let us describe briefly the procedure of the No-Outsider/No-Cost sessions. There were 2
experimenters and 3 subjects in a room. The experimenters instructed how to play the experiment byusing a tape recorder.19 During the instruction, the ceiling price20 was announced to all subjects.
Although the experimenters announced that the number of periods had already been decided, they
did not inform subjects of the exact number. Each subject put a plate indicating her/his ID number21
and unit cost at her/his neck to display for other subjects. After the instruction, subjects had an
opportunity to ask any questions about the experimental procedure, and they could do so again to18

For example, a survey of major public construction works projects undertaken in the mid-1970s
reported that those firms that hired former officials submitted bids that were 99.92 percent of the ceiling
prices (Yamamoto (1975)). Related literature (e.g., McMillan (1991), Woodall (1996)) suggested that theceiling price might be leaked to the bidders, typically via the former officials employed by the bidding
firms.
19
We used a tape recorder to minimize the interaction between the subjects and the experimenters. The
content of the instruction by a tape recorder is identical to that of the instruction sheet. We used words ofneutral meanings in the instruction. After the instruction, the tape recorder was used to record theconversation among subjects in a manner that subjects could not recognize it. The conversation recorded
provided an important resource for the analysis of the subjects’ behavior described in the next section.
20
Since the experiments were conducted during two days, we used different pairs of the ceiling price andthe unit cost.
21
No personal names were used during the experiments. Instead, we assigned an ID number to eachsubject.

6

understand the experiment completely after three periods for practice.22 Subjects were allowed tocommunicate face-to-face with each other in 3 minutes before each period began.23 After the time forcommunication, each subject decided her/his own offer price, which was an integer, wrote it on
Report Sheet and put the sheet into a small box in front of her/him. The experimenters collected the
sheets and decided the winning price and the winner in the following manner. The winning price isthe lowest offer price, which is equal to or lower than the ceiling price, and a subject who submitted
it becomes the winner in the period. When multiple subjects submitted the lowest offer price, they
cast a die, and a subject whose number is the largest becomes the winner in the period.24 If thelowest offer price is larger than the ceiling price, no subject becomes the winner in the period. The
experimenters announced the winner’s ID number and the winning price and wrote them on theblackboard to show them to all subjects. While the winner’s profit in the period was equal to thewinning price minus the unit cost, the losers’ profits were zero. Subjects computed their own profits
in the period and wrote it on their Record Sheets.25 This process was repeated 27 times, and theexperimenters announced that the experiment was over after period 27 finished. Subjects computed
their total profits and filled questionnaires on their Answer Sheets, in which they answered theirstrategies of deciding the offer prices, the contents of communication with other subjects and theimpression of the experiments and so on. Each subject’s earning was proportional to the total profits.
In the Outsider/No-Cost sessions, 3 subjects and an outsider went to different rooms and wereseparately instructed by the experimenters. Subjects were not informed of the number of subjects.
Although the 3 subjects were allowed to communicate each other, they were not allowed to do withthe outsider. The other aspects of the sessions were identical to the baseline session. In the NoOutsider/Cost and Outsider/Cost sessions, losers’ profits in each period were -7. This information
was included in the instruction. The other aspects of the sessions in the No-Outsider/Cost andOutsider/Cost sessions were identical to the No-Outsider/No-Cost and Outsider/No-Cost sessions,
respectively.
We conducted a series of the experiments at the University of Tsukuba in December 1994. The
total number of subjects was 80, and all of them were inexperienced undergraduate students of the
University of Tsukuba.26 In recruiting them, we did not announced that there were 4 types of theexperiments. The subjects consisted of both economics and non-economics majors. In addition, we

22Subjects’ answers to the questionnaires indicated that almost all (78 of 80) subjects completely
understood the rule of the experiments before period 1. The others answered that they did at period 3.
23
We did not restrict the content of communication except physical threats.
24
In the actual bidding, when multiple construction firms submit the lowest offer prices, the governments
randomly select one of them as the winner (The Society for the Study of the Bidding System (1999)).
25
Even though a subject looked at the other subject’s Record Sheet, she/he could not obtain any
additional information because all information needed to compute the profit was given to all subjects inadvance.
26“Inexperienced’ means that the students have not participated in any economic experiments before.

7assured that subjects in the same group had not known each other before the experiments. Sessions
lasted between 80 and 105 minutes, including the instruction. The mean total payoff was $15.50 per
subject.

2.3 Predictions of subjects’ behavior
Before the analysis of the result, consider the predictions of subjects’ behavior in our
experiments on the basis of standard theoretical and experimental results. In all sessions, eachsubject has one unit capacity and a constant unit cost of C. The experimenters demand one unit at theceiling price of 15+C. A difference between the ceiling price and the unit cost is fixed at 15. Subjects
were informed not of the exact number of periods but of the fact that the number of periods had been
already determined prior to the experiments. Thus, the experiments are the finitely repeated firstprice sealed-offer auction in which the final period is not clear.
First, consider subjects’ behavior in the No-Outsider/No-Cost sessions. Many earlier
experimental results indicate that communication among subjects have a robust effect to makecollusion.27 For example, Une and Saijo (1998) conducted the first-price sealed-offer auction
experiments under the same setting except the number of subjects. They found that subjects
successfully cooperated until the final period in all 5 sessions and that the winning price was fixed at
the ceiling price in almost all of periods. These previous results suggest that subjects are likely tomake robust collusion in all periods. However, note that there is a probability that some subjects
defect in some period before the end of the sessions even though collusion has been successfully
maintained in the previous periods. That is, if some subjects feel it sure that the session will be final
at a certain period, their optimal strategies are to submit a slightly lower offer price than the winning
price predetermined by collusion in the period. The period in which defection occurs depends oneach subject’s subjective probability that a given period may be the last.
In the Outsider/No-Cost sessions, using the analysis of a partial cartel by McAfee and McMillan(1992), we can interpret this situation as the auction with 2 symmetric bidders who are not allowed
to communicate with each other. The subjects’ decision-making is a kind of the finitely repeatedprisoner’s dilemma game. If subjects are informed of a definite final period, it is well known that
submitting C+1 in all periods is a subgame perfect equilibrium strategy. However, Kreps et al.
(1982) show that if there is incomplete information about types of subjects (e.g., purely rational or
altruistic) and if subjects believe that others are altruistic or adopt a ‘tit-for-tat’ strategy, theyrationally cooperate in early periods in order to build a reputation for cooperation. This sequential
equilibrium reputation hypothesis has been examined and supported by some previous experimental
27

The fact that communication among subjects has a dominant effect to generate robust cooperation isreported by a various kind of experimental papers. For example, Isaac and Plott (1981) in the double
auction, Isaac, Ramey and Williams (1984) in double and posted offer auctions, Isaac and Walker (1985)8

studies such as McKelvey and Palfrey (1992) and Andreoni and Miller (1993). For example,
Andreoni and Miller (1993) conducted a series of experiments of the finitely repeated prisoner’s
dilemma game in which a final period was announced in advance. They observed that the subjects
were significantly more cooperative than those in a one-shot game in all period except a final one
and that an increase in subjects’ belief about the probability that their opponent was cooperative
enhanced their cooperation. Considering these studies, we can predict that tacit collusion may occur
in some sessions if some subjects believe that the other subjects are sufficiently cooperative or adopt
a tit-for-tat strategy.
Next, consider subjects’ behavior in the No-Outsider/Cost sessions. Basically, the prediction is
identical to that in the No-Outsider/No-Cost sessions. However, the sunk cost raises an incentive todefect from the collusive agreement in the final period subjects anticipate. For example, assume thatcollusion in which all subjects identically submit the ceiling price has been kept from periods 1 to 20.
The current period is period 20. In case of the No-Outsider/No-Cost sessions, a subject who strongly
feels that period 20 is final can obtain a profit of 14 by submitting C+14. Since the expected profit
by submitting the ceiling price is 5,28 an increase in the expected profit is 9 (=14-5). On the other
hand, in case of the No-Outsider/Cost sessions, since the expected profit by submitting the ceiling
price in the same situation is 1/3, an increase in the expected profit is 41/3 (=14-1/3), which is larger
than that in the No-Outsider/No-Cost sessions. The difference of an increase in the expected profit
by the defection may have some effect on subjects’ behavior.
In the Outsider/Cost sessions, subjects may behave in the same way as they do in theOutsider/No-Cost sessions. If successful tacit collusion doesn’t occur, the winning price decreases to
C-6, which is the subgame perfect equilibrium price. Even though tacit collusion occurred, eachsubject’s incentive of defection in a certain period in which she/he believes that the session is final islarger than that in the Outsider/No-Cost sessions.

3. Results
First, we define the dango effectiveness index29 as µ = (p - C)/(p* - C), where p , p* and C are thewinning offer prices, the ceiling price and the unit cost, respectively. The index is a rate of the profit
given by the winning offer price to the maximum profit. The index allows us to compare results ofthe experiments since it doesn’t depend on absolute levels of parameters. If the winning prices areequal to the ceiling price C+15, C+1, the unit cost C and C-6, the indexes are 1.0, 0.067, 0.0 and –in the first-price sealed-bit auction.
28
If all subjects submit the ceiling price C+15, each subject obtains profits of 15 and 0 with probability of
1/3 (winning) and 2/3 (losing), respectively. The expected profit per period is computed as(1/3)×15+(2/3)×(0)=5. In case of the sessions with the sunk cost, since a loser’s profit is –7 withprobability of 2/3, the expected profit per period is computed as (1/3)×15+(2/3)×(-7)=1/3.
29
Naming this index, we referred to the index of monopoly effectiveness defined by Isaac, Ramey and90.40, respectively.

3.1 The No-Outsider/No-Cost sessions
In the No-Outsider/No-Cost sessions except session 1, robust collusion occurred, and thewinning prices were equal to the ceiling price in all periods (see Figure 1). No subject broke thecollusive agreement. This result is consistent with previous experimental results of Une and Saijo(1998). The answers to the questionnaires of the Answer Sheets and the content of the conversation
among subjects indicate that they adopted the following two strategies. The first is that while thepredetermined winner submits the ceiling price, the other subjects submit higher offer prices than theceiling price. As a way to select the winner, the phases-of-the-moon system was adopted. The otherstrategy is that all subjects submit the ceiling price and that the winner is decided by throwing a die(the identical-offer-price strategy).30 These are the same strategies as McAfee and McMillan (1992)
suggested. As a result, the mean dango effectiveness index throughout the sessions was 0.90.

The Dango Effectiveness Index
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Session 1
Session 4

Session 2
Session5

Session 3

PeriodFigure 1: The dango effectiveness index in the No-Outsider/No-Cost sessions

On the other hand, different behavior was observed in session 1. After price competition
occurred between 0.2 and 0.5 in the index until period 14, price competition and cooperation wererepeated by turns. As a result, the winning price was equal to the ceiling price in only 5 of 27 periods.
The content of the conversation and the answers to the questionnaires indicate the following
subjects’ behavior. From periods 1 to 14, they agreed to freely decide their offer prices. In period 15,

Williams (1984).
30
While 12 of 15 subjects answered the phases-of-the-moon strategy as the best one to the questionnairesof the Answer Sheets, 3 subjects answered the identical-offer-price strategy.

10subject 2 proposed to adopt the identical-offer-price strategy, and the other subjects followed it.
After all subjects agreed to freely decide their offer prices from periods 16 to 19, they adopted theidentical-offer-price strategy from periods 20 to 22 again. In period 23, they agreed to establish aminimum offer price of 110 where the mean dango effectiveness index was 0.67. Under thelimitation of their offer prices, they freely decided their offer prices from periods 23 to 25. After they
adopted the identical-offer-price strategy in period 26, they freely decided their offer prices in a final
period again.
We summarize these observations as follows:

Observation 1: In the No-Outsider/No-Cost sessions except session 1, subjects completely make andmaintain the collusive agreement, and the winning price is completely fixed at the ceiling price.

3.2 The Outsider/No-Cost sessions
The entry of the outsider had a strong effect to stimulate each subject’s incentive to competewith other subjects.31 Figure 2 illustrates the patterns of the dango effectiveness indexes in theOutsider/No-Cost sessions. In all sessions except session 2, price competition occurred, and thewinning price decreased to near C+1. On the other hand, in session 2, 3 subjects in the same roomraised their offer prices in order to have the outsider raise the offer price. Since the outsider
cooperatively responded to this action and lifted her offer price, stable tacit collusion occurred, andthe winning price increased gradually. Cason (1995) used a word of price signaling as behavior that
subjects posted non-binding offer price for the purpose of communicating with other subjects. The 3
subjects’ behavior we observed is considered to be another type of price signaling using binding
offer prices. Although the same type of price signaling was also observed in sessions 3, 4 and 5, it
could not raise the winning price. These observations indicate that price signaling doesn’t always
work as an effective tool for generating tacit collusion.32 The mean dango effectiveness index
throughout the sessions was 0.12, which was slightly above the level of the subgame perfectequilibrium price 0.067 (=1/15).33
In session 1, 3 subjects in the same room did not communicate with each other throughout the31

In Outsider/No-Cost sessions, while no subjects including outsiders answered the phases-of-the-moon
strategy or the identical-offer-price strategy as the best one to the questionnaires of the Answer Sheet, 10
of 20 subjects answered submitting C+1 as the best one. In addition, 10 of 20 subjects answered pricesignaling as a strategy they actually adopted.
32
This is consistent with the previous experimental results such as Holt and Davis (1990), (1994), Cason(1995) and Davis and Wilson (1999).
33
We examine whether the mean index (0.12) was significantly larger than 0.067 by using t test. The
variance of the mean index was 0.026. Since the t value was 2.15, we could reject the null hypothesis thatthe mean index was equal to 0.067 at the 5% significance level for one-tailed test. However, when we
excluded data of session 2, the mean index and variance of the other 4 sessions were 0.086 and 0.004,
respectively. Since the t value under the same hull hypothesis was 0.31, we could not reject the null11

session at all. According to the reason of not communicating with each other, subjects 1 and 3 wrote
on the Answer Sheets that because there were other subjects in the separate room, they felt that
communication was useless. This suggests that the existence of the outsider reduced the subjects’
incentive to cooperate with other subjects.

The Dango Effectiveness Index
0.5

0.4

0.3

0.2

0.1

0
1

2

3

4

5

6

7

8

9

Session1
Session4

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Session2
Session5

Session3

PeriodFigure 2: The dango effectiveness index in the Outsider/No-Cost sessions

Next, let us describe subjects’ behavior of unsuccessful price signaling in session 4. Figure 3
shows sequences of 4 subjects’ offer prices. The ceiling price and the unit cost were 115 and 100,
respectively. Although 3 subjects in the same room did not communicate with each other fromperiods 1 to 13, subject 3 proposed to raise their offer prices in order to stimulate an outsider’swillingness to raise her offer price. The other subjects agreed about this proposal, and all subjects
raised their offer prices in period 14. However, the outsider did not respond to it cooperatively andkept fixing her offer price at 100 or 101. On the Answer Sheet, the outsider wrote that she thoughtthat the best strategy was to submit 101. This means that the outsider had no idea of cooperation
with the other subjects.

hypothesis at the 5% significance level for one-tailed test.

12

The offer price

116
114
112
110
108
106
104
102
100
98

1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Subject 1

Subject 2

Subject 3

OutsiderPeriodFigure 3: The offer prices in session 4 of the Outsider/No-Cost treatment(The Unit Cost: 100, The ceiling Price: 115)
In contrast with session 4, price signaling worked effectively and tacit collusion successfully
occurred in session 2. Interestingly, as 3 subjects raised their offer prices, an outsider also raised heroffer price step by step (see Figure 4). As a result, the winning price increased from 102 to 107. Let
us describe the subjects’ behavior more precisely. From periods 1 to 10, 3 subjects in the same room
agreed to submit much higher offer prices than the unit cost in order to observe which price theoutsider would submit. Subject 1 noticed that the 3 subjects in the same room prevented the winning
price from increasing because subjects 1 and 3 won at the same offer price 102 in periods 8 and 9,
respectively. Subject 1 proposed to submit a higher offer price than 102 before period 11. She said,“If we cooperate to lift our offer prices step by step, the outsiders34 will win and notice that aminimum of their offer prices is the lowest in all offer prices. Because they must want to win at ahigher price, they are also likely to raise their offer prices.” Subjects 2 and 3 agreed about this andsubmitted 104 in periods 15 and 16. The outsider also submitted 104, and the winners were decided
by casting a die in these periods. Observing this phenomenon, subject 3 said, “The outsiders didn’t
cut down their offer prices. They also must have willingness to cooperate and to raise their offer
prices.” In period 17, since the 3 subjects identically raised their offer prices to 105, the outsider won
without changing her offer price. This seemed to make the outsider assure that the other subjects
raised their offer prices gradually. After period 18, following the other subjects’ offer prices, theoutsider also raised her offer price.

34

The content of the conversation indicates that the 3 subjects seemed to consider that there were several
subjects in the separate room. This is because each subject was not informed of the total number ofsubjects in the sessions with the outsider.

13

The offer price

112
110
108
106
104
102
100

1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Subject 1

Subject 2

Subject 3

OutsiderPeriodFigure 4: The offer prices in session 2 of the Outsider/No-Cost treatment(The Unit Cost: 100, The ceiling Price: 115)
From the observation, following three factors seemed to mainly contribute to successful tacit
collusion: the first is subject 1’s leadership of price signaling. McMillan (1991) suggests that “adango organizer” who coordinates all aspects of dango has played a critical role in maintaining it.35
It is considered that subject 1 who played the role of the dango organizer coordinated and integrated
the other subjects’ behavior. The second is the outsider’s willingness to cooperate. On the Answer
Sheet, the outsider in session 2 wrote that she wanted to raise the offer price to 110 at least. Thisanswer shows that the outsider seemed to be cooperative while the outsider in session 4 had no ideaof cooperation. The third is a price signal as ‘a network transmitting subjects’ willingness tocooperate.’ The price signal was expressed by the movement of the winning price. Bysimultaneously raising their offer prices, the 3 subjects could not only send their willingness tocooperate but also monitor the movement of the winning price which was the outsider’s offer price.
If the winning price increases, they assured that the outsider were also cooperative. On the other
hand, the outsider could also assure that the other subjects had willingness to cooperate by the
movement of the winning price. These processes allowed all subjects to mutually build theirreputation for cooperation under the incomplete information about the types of other subjects. It isconsidered that the cooperative behavior through price signaling in session 2 can also be explainedby the theory of Kreps et al. (1982) and the observation of Andreoni and Miller (1993).36
35

According to McMillan (1991), the dango organizer sends fax messages to every bidder stating the timeand location of the dango conference, keeps track of which bidders have obtained contracts and performs
mediation in the event that there is quarreling over which bidder should be assigned to be a winner.
36
Moreover, as suggested by Kreps et al. (1982), the subjects in session 2 may have pretended to becooperative in order to build a reputation for cooperation. We can interpret the answer of the outsider insession 2 as follows: “If the winning price were above 110, I would submit a slightly lower price than110.” Unfortunately, the end of the session came before the winning price achieved to the level. In order
to examine this idea, we need to conduct experiments with more periods.

14

Moreover, probability of generating successful tacit collusion is 0.2 since it occurred in only one
session. Interestingly, this probability is identical to the average probability of cooperation in
repeated one-shot prisoner’s dilemma experiments reported by Andreoni and Miller (1993).
We summarize these observations as follows:

Observation 2: The outsider has a robust effect to prevent subjects from colluding and to generate
price competition. The winning price decreases to near the subgame perfect equilibrium price.
However, if all subjects including the outsider are cooperative and if they can recognize it byusing price signaling, successful tacit collusion may occur.

3.3 The No-Outsider/Cost sessions
The sunk cost had an effect to loosen the collusive agreement although the impact was muchsmaller than the outsider effect. In sessions 1 and 5, the defection from the collusive agreement wasobserved, and the winning price decreased in some periods (see Figure 5). On the other hand, insessions 2 and 3, successful collusion occurred, and the winning price was fixed at the ceiling pricein almost all of periods. Subjects in these sessions decided the winner in each period by using thephases-of-the-moon strategy.37 In session 4, a different type of collusion occurred, and the winning
price regularly deviated from the ceiling price. As a result, the mean dango effectiveness index
throughout the sessions was 0.79.

The Dango Effectiveness Index
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Session1
Session4

Session2
Session5

Session3

PeriodFigure 5: The dango effectiveness index in the No-Outsider/Cost sessions

Let us focus on defective behavior in sessions 1 and 5. The defection was observed in periods 1

37

In No-Outsider/Cost sessions, while 11 and 1 of 15 subjects answered the phases-of-the-moon strategy
and the identical-offer-price strategy as the best one to the questionnaires, respectively.

15and 21 of session 1 and period 19 of session 5.38 First, in period 1 of session 1, although all subjects
agreed to submit the ceiling price, subject 3 submitted a slightly lower price. As the reason of thedefection, subject 3 wrote on the Answer Sheet that he thought other subjects would submit lower
offer prices than the agreed level. This answer indicates that his lack of trust in other subjects caused
the defection. Second, in period 21 of session 1, subject 2 broke collusion in which all subjects
agreed to adopt the phases-of-the-moon strategy. On the Answer Sheet, subject 2 wrote that since hefelt that the end of the session was coming soon, he wanted to win by submitting the slightly lower
offer price than the ceiling price. This indicates that subject 2’s prediction of a final period caused
the defection. Third, in period 19 of session 5, subject 3 broke collusion in which all subjects agreed
to adopt the identical-offer-price strategy. She wrote on the Answer Sheet that she did not follow theagreement in order to raise her own profit. From her answer, the change of her behavior fromcooperation to defection seemed to be caused by her prediction of a final period. This is because if
she did not predict that period 19 was final, her optimal strategy would be to keep following theagreement. Comparing the result of the No-Outsider/No-Cost sessions in which no defection wasobserved, we can consider that the sunk cost has an effect to generate defection although it seemed
to be restrictive.
On the other hand, in session 4, all subjects agreed about the following behavior: while thewinner was selected by using the phases-of-the-moon system in every 3 periods (i.e., periods 7, 10,
13,…, 25), subjects competed to win in a range established prior to each period in the other periods.
In the conversation among subjects at the beginning of the session, subject 3 told that pricecompetition was more exciting than collusion, and the other subjects agreed to do so.
We can summarize the observations as follows:

Observation 3: Under the no-outsider condition, the sunk cost has an effect to strengthen subjects’
incentive to defect from collusion at a specific period in which they believe the session ends.
However, the impact on the subjects’ behavior is restrictive.

3.4 The Outsider/Cost sessions
A Joint effect of the outsider and the sunk cost also prevented subjects from colluding.39
Although price signaling caused successful tacit collusion in session 2, price competition occurred in
the other sessions. As a result, except session 2, the dango effectiveness index converged on –0.4,

38

In periods 2, 3 and 22 to 26 of session 1 and periods 19 to 21 of session 5, the subjects could not agree
about any collusive actions. In periods 7 to 9 of session 5, all subjects agreed to freely decide their offer
prices.
39
In Outsider/Cost sessions, while no subjects including outsiders answered the phases-of-the-moon
strategy and the identical-offer-price strategy as the best one to the questionnaires, 15 of 20 subjects
answered submitting C-6 as the best one.

16

which was the subgame perfect equilibrium level (see Figure 6). The mean dango effectivenessindex throughout the sessions was –0.30, which was not significantly larger than –0.40.40

The Dango Effectiveness Index
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Session1
Session4

Session2
Session5

Session3

PeriodFigure 6: The dango effectiveness index in the Outsider/Cost sessions

First, let us describe subjects’ behavior in sessions 1, 3, 4 and 5. In session 1, 3 subjects in thesame room tried to send a price signal in order to have an outsider lift his offer price. However, theoutsider did not respond to it cooperatively. In sessions 3, 4 and 5, 3 subjects did not communicate
with each other throughout the sessions. In these sessions, 6 of 12 subjects wrote on the Answer
Sheet that because other subjects were in the separate room, they thought that communication was
useless.

40

We examined whether the mean index (-0.30) was significantly larger than –0.40 by using the t test.
The variance of the mean index was 0.051. Since the t value was 1.89, we could not reject the null
hypothesis that the mean index was equal to –0.40 at the 5% significance level for one-tailed test.

17

116

The offer price

114
112
110
108
106
104
1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Subject 1

Subject 2

Subject 3

OutsiderPeriodFigure 7: Successful price signaling: the offer price in session 2 of the Outsider/Cost treatment(The Unit Cost: 110, The ceiling Price: 125)On the other hand, subjects in session 2 succeeded to make tacit collusion by price signaling(see Figure 7). The ceiling price and the unit cost were 125 and 110, respectively. The winning pricegradually increased from 104 to 115. Let us describe subjects’ behavior. Before period 5, 3 subjects
in the same room agreed to submit more than 110 in order to observe which offer price the outsider
would submit. Observing that subject 1 won at 107 in period 7, subjects 2 and 3 said, “The outsider
seems to be lifting her offer price.” After the outsider raised her offer price by one unit in period 9,
the winning price gradually increased by one unit in every 2 or 3 periods. Before period 13, subject 1
said, “The winning price is increasing step by step. Let’s keep raising our offer prices.” Subjects 2
and 3 agreed to do so. The outsider positively responded to price signal and raised her offer price inthe subsequent periods. On the Answer Sheet, the outsider wrote that she continued to adopt thestrategy of deciding her offer price by considering an upward trend in the winning price. The 3
subjects also wrote that they intended to make the outsider raise her offer price by raising their offer
prices simultaneously. These answers indicate that all subjects including the outsider had willingness
to cooperate to raise the winning price.
Surprisingly, the probability of cooperation in the Outsider/Cost sessions is also 0.2, which is
identical to the Outsider/No-Cost sessions. Although it is not clear whether subjects who
successfully generated tacit collusion were really altruistic or not, these results are consistent withAndreoni and Miller (1993)’s observation.
We can summarize the observations as follows:

Observation 4: The mixture of the outsider and the sunk cost effects reduces an incentive of subjects
to collude. As a result, price competition occurs, and the winning price decreases considerably.
However, even though there is the joint effect, tacit collusion may occur if all subjects including18

an outsider have willingness to cooperate and can recognize it by using price signaling.

3.5 Comparison of the mean dango effectiveness index
In this section, we compare the mean dango effectiveness indexes between treatments
statistically. Figure 8 shows the patterns of the mean indexes across 27 periods for 5 sessions in eachexperiment. The horizontal axis corresponds to periods, and the vertical axis corresponds to themean dango effectiveness index.

The Mean Dango Effectiveness Index
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Outsider/No-Cost
Outsider/Cost
PeriodNo-Outsider/No-Cost
No-Outsider/Cost

Figure 8: The mean dango effectiveness index in each treatment

In the Outsider/No-Cost sessions, the mean dango effectiveness index moves around 0.1. In theOutsider/Cost sessions, after the mean index decreases to –0.39 until period 8, it gradually increases
to –0.25. In the No-Outsider/No-Cost sessions, the mean index across sessions fluctuates between
0.85 and 1.0. In the No-Outsider/Cost sessions, the mean index fluctuates between 0.6 and 1.0 after
period 4. It is evident from Figure 8 that the mean indexes in the Outsider/No-Cost and theOutsider/Cost sessions are much lower than those in the No-Outsider/No-Cost and the NoOutsider/Cost sessions, respectively. The mean index in the Outsider/Cost sessions is also lower thanthat in the Outsider/No-Cost sessions. On the other hand, the difference between the mean indexes in
the No-Outsider/Cost and No-Outsider/No-Cost sessions is not clear.
We used the randomization test to examine the significance of differences between the mean
dango effectiveness indexes in these sessions.41 From the tests and the patterns illustrated in Figure 8,
we obtained the following 3 observations.

Observation 5: The mean dango effectiveness indexes in the Outsider/No-Cost and the Outsider/Cost

19

are significantly lower than those in the No-Outsider/No-Cost and No-Outsider/Cost sessions at
5% significance level in all periods, respectively. The outsider has an effect to make the winning
price decrease considerably, regardless of the existence of the sunk cost.

Observations 6: The mean dango effectiveness index is not significantly different between in the NoOutsider/No-Cost and the No-Outsider/Cost sessions at 5% significance level in any periods. If
there is no outsider, the sunk cost has no effect on the winning price.

Observation 7: The mean dango effectiveness index in the Outsider/Cost sessions is significantly
lower than that in the Outsider/No-Cost sessions at 5% significance level in all periods. If thereis the outsider, the sunk cost has an effect to make the winning price decrease.

4. Concluding Remarks
We conducted a series of experiments in order to obtain some insight into the effect of theJapanese new public construction works procurement system. The experiments are first attempts to
examine the effect of the entry of the outsider and the sunk cost in the bidding system by using theexperimental method. From the results, we found the following three conclusions. First, the outsider
has a strong effect to prevent subjects from colluding and to make the winning price decrease to thesubgame perfect equilibrium price. Second, if subjects including the outsider have willingness tocooperate with other subjects and if they can recognize it by using price signaling, they can form
successful tacit collusion. As a result, the winning price increases gradually. Interestingly, since
successful tacit collusion occurred in 2 of 10 sessions with an outsider, we obtained the sameobservation of Andreoni and Miller (1993) that the average probability of cooperation was about 0.2.
Third, the sunk cost has an effect to strengthen subjects’ incentive to defect from collusion throughtheir expectation of a final period. However, the impact is restrictive, and the sunk cost does notmake the winning price decrease.
The result of the experiments implies that a policy to help outsiders such as foreign firms toparticipate in the bidding may be a crucial countermeasure against bidders’ dango. In the new
bidding system, requirements for the eligibility for participating in the bidding were reformed in a
way that foreign firms were not behind Japanese firms. The implication we obtained supports the
direction of this revision for the bidding system. If outsiders actually participate in the bidding, we
can expect that it is more difficult for dango members to collude and that the winning pricedecreases considerably under the new bidding system.
However, it is difficult to assure that the entry of foreign firms naturally have the same effect as
the result of the experiments in a real situation. Note that successful tacit collusion by price signaling
41

The details and results of the statistical analysis are shown in the Appendix.
20

was observed in 2 sessions with an outsider. This means that even though the outsiders participate in
the bidding, the winning price does not always decrease considerably if all bidders have willingness
to collude and can recognize it by using some tool such as price signaling. As McMillan (1991)
suggests, many complex features of the Japanese construction industry such as a dango organizer, aninter-firm association and collusion between firms and officials are likely to have contributed tomake and maintain dango. In fact, we observed that subject 1 in session 2 of the Outsider/No-Cost
sessions played a role of the dango organizer and mainly contributed to make tacit collusion. In
order to estimate the effect of the new bidding system more precisely, further research for
identification of factors generating tacit collusion and for examination of the impacts on bidders’behavior are needed. For example, examination of an effect of the dango organizer on other subjects’
behavior is considered to be one of the important research objectives.
Moreover, we should continue to isolate other factors that prevent bidders from colluding and to
examine their effects by using an experimental method. One of the candidates is a penalty forcollusion. The previous studies such as McMillan (1991) and Woodall (1996) point out that the light
penalty for collusion in Japan is one of causes for dango. The fine of the criminal penalty against afirm amounts to a maximum of 100 million yen, which is about one-tenth of that in the United States.
The actual number of legal measures per year was about 8 from 1989 to 1997, which was also muchsmaller than that of the United States. Although there is possibility that the penalty against collusion
has some effect on bidders’ collusive behavior, studies of the impact have not been reported. It isnecessary to conduct the experiments designed to examine the penalty effect on bidders’ behavior in
the future.

21

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Experimental Evidence,” The Economic Journal, Vol. 103, pp.570-585, 1993.
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Chubu Regional Construction Bureau, Ministry of Construction,” November 16, 1993. (inJapanese)
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Davis, D. D. and C. A. Holt, Experimental Economics, Princeton University Press, 1993.
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Hashimoto, R., “The Myth of Limited Access to Public Works Projects,” Liberal Star, March 15,
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Markets,” Economics Letters, Vol. 34, pp. 307-310, 1990.
Isaac, R. and C. Plott, “The Opportunity for Conspiracy in Restraint of Trade,” Journal of
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Repeated Prisoner’s Dilemma,” Journal of Economic Theory, Vol. 27, pp.245-252, 1982.
McAfee, R. and J. McMillan, “Bidding rings,” American Economic Review, Vol. 82, pp.579-599,
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Econometrica, Vol.60, pp.803-836, 1992.
McMillan, J., “Dango: Japan’s Price-Fixing Conspiracy,” Economics and Politics, Vol. 3, pp.201218, 1991.
Saijo, T., M. Une and T. Yamaguchi, “Dango Experiments,” Journal of the Japanese andInternational Economies, Vol. 10, pp.1-10, 1996.
Takeda, H., Economics of Dango, Shueisha, 1994. (in Japanese)

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The Society for the Study of Practice of the Public Works Contract System, “Practice of the New
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Appendix:
The tests of differences in the mean dango effectiveness index using a randomization test
We examined the significance of differences between the mean dango effectiveness indexes inthe sessions using a randomization test.42 The following 4 hypotheses were tested.

Test 1. H0: µOutsider/No-Cost,j = µOutsider/Cost,j, H1: µOutsider/No-Cost,j > µOutsider/Cost,j;Test 2. H0: µNo-Outsider/No-Cost,j = µNo-Outsider/Cost,j, H1: µNo-Outsider/No-Cost,j > µNo-Outsider/Cost,j;Test 3. H0: µNo-Outsider/No-Cost,j = µOutsider/No-Cost,j, H1: µNo-Outsider/No-Cost,j > µOutsider/No-Cost,j;Test 4. H0: µNo-Outsider/Cost,j = µOutsider/Cost,j, H1: µNo-Outsider/Cost,j > µOutsider/Cost,j,where µi,j indicates the mean dango effectiveness index in period j of session i.
The result of these tests is given in Table 3. Figures in boxes are the p-values.

Table 3: The result of the randomization test on the difference in the mean of 2 experiments
Test 1
Test 2
Test 3
Test 4
1
0.01
0.40
0.02
0.01
2
0.02
0.17
0.00
0.03
3
0.01
0.28
0.01
0.05
4
0.01
1.00
0.01
0.01
5
0.01
1.00
0.01
0.01
6
0.01
1.00
0.00
0.01
7
0.00
1.00
0.01
0.00
8
0.01
0.58
0.01
0.01
9
0.01
1.00
0.01
0.02
10
0.01
1.00
0.01
0.01
11
0.01
1.00
0.01
0.01
12
0.01
1.00
0.01
0.01
13
0.02
1.00
0.01
0.01
14
0.02
1.00
0.01
0.01
15
0.03
1.00
0.01
0.01
16
0.03
1.00
0.01
0.01
17
0.04
1.00
0.01
0.01
18
0.04
1.00
0.02
0.01
19
0.04
1.00
0.02
0.01
20
0.04
0.44
0.01
0.02
21
0.04
0.17
0.01
0.01
22
0.04
1.00
0.00
0.02
23
0.08
0.44
0.00
0.05
24
0.04
0.44
0.00
0.05
25
0.04
1.00
0.00
0.04
26
0.04
0.44
0.00
0.05
27
0.04
0.44
0.01
0.01
Table 3 provides us the following 4 observations.
(1) The mean dango effectiveness index in the Outsider/No-Cost sessions is significantly larger than42

The details how to use the randomization test is shown in chapter 9 of Davis and Holt (1993).

24

that in the Outsider/Cost sessions in all sessions except period 23 at 5% significance level.
(2) No significant difference between the mean dango effectiveness indexes in the No-Outsider/NoCost and No-Outsider/Cost sessions at 5% significance level is observed.
(3) The mean dango effectiveness index in the No-Outsider/No-Cost sessions is significantly larger
than that in the Outsider/No-Cost sessions in all periods at 5% significance level.
(4) The mean dango effectiveness index in the No-Outsider/Cost sessions is significantly larger thanthat in the Outsider/Cost sessions in all periods at 5% significance level.

25

Sheets used in the Experiments and Data∗
Mitsuhiro Nihashi, Tatsuyoshi Saijo and Masashi Une
1.

Instruction Sheet
1.1 Instruction Sheet for the Outsider/No-Cost sessions
1.1.1 For 3 subjects
1.1.2 For an outsider
1.2 Instruction Sheet for the Outsider/Cost sessions
1.2.1 For 3 subjects
1.2.2 For an outsider
1.3 Instruction Sheet for the No-Outsider/Cost sessions
1.4 Instruction Sheet for the Outsider/No-Cost sessions
2. Experimental Procedure
2.1 For those who are not outsiders
2.2 For outsiders
3. Record Sheet
3.1 For the Outsider/No-Cost sessions.
3.2 For the Outsider/Cost sessions
3.3 For the No-Outsider/No-Cost sessions
3.4 For the No-Outsider/Cost sessions
4. Answer Sheet
4.1 Answer Sheet for the Outsider/No-Cost sessions.
4.1.1 For 3 subjects
4.1.2 For an outsider
4.2 Answer Sheet for the Outsider/Cost sessions
4.2.1 For 3 subjects
4.2.2 For an outsider
4.3 Answer Sheet for the No-Outsider/No-Cost sessions
4.4 Answer Sheet for the No-Outsider/Cost sessions
5. Offer Prices
5.1 The Outsider/No-Cost Experiments
5.2 The Outsider/Cost Experiments
5.3 The Outsider/No-Cost Experiments
5.4 The Outsider/Cost Experiments∗

These are translated directly from the experimental materials written in Japanese.

26

1. Instruction Sheet
1.1 Instruction Sheet for the Outsider/No-Cost sessions
1.1.1 Ror 3 subjects
Abstract
In this experiment, we assume that you produce one unit of good in each period. If you can sell
one unit to the experimenters at your offer price, you get an amount of the offer price minus a
production cost as a profit. However, because there are some other subjects who can sell the same
good, your offer price has to be satisfied with the following two conditions in order to sell to theexperimenters. The first is that your offer price is equal to or lower than a price the experimentersdetermined prior to the experiment. The second is that your offer price is the lowest one in all offer
prices. Your payoff is determined by a sum of your profits, and the experimenters will pay it to youat the end of the experiment. We will explain how to determine your payoff afterward.
During the experiments, you can talk with other subjects if the experimenters permit it. Otherwise,
don’t talk anything. Please follow the experimenters’ direction.
Explanation
Please confirm the following six sheets of papers on your desk.
・Abstract and Experiments (This sheet) ・Personal Card
・Name Plate
・Record Sheet・Box・Report Sheet (a bundle of paper) ・Experimental Procedure
First, please write your name, belongings, sex and age on your Personal Card. You will fill in yourreceipt after the experiment.
Your “ID Number” and “Your Cost” is written on your Name Plate. Your Cost is a cost that you
must spend on producing one unit of the good.
Record Sheet is used for the record of Your Cost and your profit. Please write Your Cost on your
Record Sheet. Put your Name Plate on near your neck in such a way that other subjects can see it
well.
Report Sheet is used to inform the experimenters of your offer price. Please use one piece of paperin each period. When you finish writing your offer price on your Report Sheet, please put it into your
Box.
Experimental Procedure summarizes the procedure of the experiment. Please refer it if necessary.
Let us now explain about the detailed procedure of this experiment. The experiment will continue
until the experimenters say, “The experiment has ended.” The number of periods has been alreadydetermined. But, the experimenters don’t inform you of it. When each period starts, write your offer
price on your Record Sheet in such a way that other subjects cannot see it. Your offer price you canwrite is limited in a range the experimenters will assign. If your offer price is smaller than aminimum price of the range, it will be assumed as the minimum price. If it is higher than amaximum price of the range, it will be assumed as the maximum price. Finishing writing your offer
price on your Record Sheet, put it into your Box. The experimenters collect it and determine which
subject they will buy one unit of the good from in the following manner. The experimenters havealready determined “The Highest Price.” The Highest Price is the maximum price at which theexperimenters want to buy one unit of the good. The experimenters remove offer prices that are
higher than The Highest Price. Offer prices equal to The Highest Price are not removed. The
experimenters find the lowest offer price in all prices not removed and buy one unit of the good froma subject who submitted it at the offer price. When all offer prices are higher than The Highest Price,
the experimenters don’t buy the good in the period. The Highest Price will be informed you before
the experiment starts by the backboard. The Highest Price is fixed throughout the experiment.

27

In order to understand the procedure described above, let us show a simple example. It is assumed
that 3 subjects, A, B and C submit 130, 140 and 150, respectively. The Highest Price is assumed to
be 145. First, the experimenters remove subject C’s offer price because 150 is higher than The
Highest Price. In the other offer prices, subject A’s offer price is the lowest price. So, subject A willsell one unit of the good at 130 to the experimenters.
When the experimenters buy the good, they say, “We will buy one unit of the good at (the lowest
offer price) from (ID Number).” In addition, they write the lowest offer price and the subject’s ID
Number on the blackboard. Please raise your hand if your ID Number is announced. If all offer
prices are higher than The Highest Price, the experimenters say, “We cannot buy the good.” If
multiple subjects submit the lowest offer price, the experimenters tell them to throw a die. If your ID
Number is announced, throw a die. The experimenters buy the good from a subject whose number ofa die is the highest. This is the end of one period.
Before each period, you can talk with other two subjects. You can talk about anything. But, you
are not allowed a physical threat. While a maximum time of talking is 5 minutes before periods 1, itis 3 minutes before the other periods. After the experimenters say, “You can talk with othersubjects,” you can start talking. If the talking time finished, the experimenters say, “Stop talking.” Assoon as you determine your offer price, you write the offer price on your Report Sheet and put it into
your Box. Don’t talk without the experimenters’ direction. In the experiments, there are somesubjects in the other room. They also want to sell the good to the experimenters. The experimenters
don’t inform you of the number of the subjects. Therefore, the experimenters compare offer prices
subjects not only in this room but also in the other room submitted. Your Cost is the same in all
subjects.
Next, let us explain how to fill in your Record Sheet. You compute your profit in the period as
follows and fill the number in the column of “Your Profit.”(1) If the experimenters announced that they would buy the good from you, your profit is the numberof your offer price minus Your Cost. Note that if your offer price is smaller than Your Cost, yourprofit is negative.
(2) Otherwise, your profit is zero.
For example, we assume that each subject’s Your Cost is 120 in the previous example. Subjects B
and C write zero in the column of Your Profit because the experimenters don’t announce their ID
Number. On the other hand, because the experimenters announce subject A’s ID Number, subject A
writes 10 (=130-120) in the column of Your Profit.
Finally, we explain your payoff. Your payoff depends on the sum of your profits and is computed
as follows:1300 + 10 × (the sum of your profits).
If the sum of your profits is 110, your payoff is 2400 (=1300 + 10 × 110).
When the experimenters say, “The experiment has ended,” follow their direction.
Before the actual experiment, you will do the three period practices. Please determine your offer
price without talking with other subjects only in the practice periods. Your profit in the practiceperiods is not counted in your payoff. The time of considering your offer price is 3 minutes. As soon
as you determine your offer price, write it on your Report Sheet and put it into your Box.
This is the end of the instruction. If you have any questions, please ask them to the experimenters.

28

1.1.2 For an outsider
Abstract
In this experiment, we assume that you produce one unit of good in each period. If you can sell
one unit to the experimenters at your offer price, you get an amount of the offer price minus a
production cost as a profit. However, because there are some other subjects who can sell the same
good, your offer price has to be satisfied with the following two conditions in order to sell to theexperimenters. The first is that your offer price is equal to or lower than a price the experimentersdetermined prior to the experiment. The second is that your offer price is the lowest one in all offer
prices. Your payoff is determined by a sum of your profits, and the experimenters will pay it to youat the end of the experiment. We will explain how to determine your payoff afterward.
During the experiments, don’t talk anything. Please follow the experimenters’ direction.
Explanation
Please confirm the following six sheets of papers on your desk.
・Abstract and Experiments (This sheet) ・Personal Card
・Name Plate
・Record Sheet・Box・Report Sheet (a bundle of paper) ・Experimental Procedure
First, please write your name, belongings, sex and age on your Personal Card. You will fill in yourreceipt after the experiment.
Your “ID Number” and “Your Cost” is written on your Name Plate. Your Cost is a cost that you
must spend on producing one unit of the good.
Record Sheet is used for the record of Your Cost and your profit. Please write Your Cost on your
Record Sheet. Put your Name Plate on near your neck.
Report Sheet is used to inform the experimenters of your offer price. Please use one piece of paperin each period. When you finish writing your offer price on your Report Sheet, please put it into your
Box.
Experimental Procedure summarizes the procedure of the experiment. Please refer it if necessary.
Let us now explain about the detailed procedure of this experiment. The experiment will continue
until the experimenters say, “The experiment has ended.” The number of periods has been alreadydetermined. But, the experimenters don’t inform you of it. When each period starts, write your offer
price on your Record Sheet. Your offer price you can write is limited in a range the experimenterswill assign. If your offer price is smaller than a minimum price of the range, it will be assumed as theminimum price. If it is higher than a maximum price of the range, it will be assumed as the
maximum price. Finishing writing your offer price on your Record Sheet, put it into your Box. The
experimenters collect it and determine which subject they will buy one unit of the good from in thefollowing manner. The experimenters have already determined “The Highest Price.” The Highest
Price is the maximum price at which the experimenters want to buy one unit of the good. The
experimenters remove offer prices that are higher than The Highest Price. Offer prices equal to The
Highest Price are not removed. The experimenters find the lowest offer price in all prices notremoved and buy one unit of the good from a subject who submitted it at the offer price. When all
offer prices are higher than The Highest Price, the experimenters don’t buy the good in the period.
The Highest Price will be informed you before the experiment starts by the backboard. The Highest
Price is fixed throughout the experiment.
In order to understand the procedure described above, let us show a simple example. It is assumed
that 3 subjects, A, B and C submit 130, 140 and 150, respectively. The Highest Price is assumed to
be 145. First, the experimenters remove subject C’s offer price because 150 is higher than The
Highest Price. In the other offer prices, subject A’s offer price is the lowest price. So, subject A willsell one unit of the good at 130 to the experimenters.

29

When the experimenters buy the good, they say, “We will buy one unit of the good at (the lowest
offer price) from (ID Number).” In addition, they write the lowest offer price and the subject’s ID
Number on the blackboard. If all offer prices are higher than The Highest Price, the experimenterssay, “We cannot buy the good.” If multiple subjects submit the lowest offer price, the experimenterstell them to throw a die. If your ID Number is announced, throw a die. The experimenters buy thegood from a subject whose number of a die is the highest. This is the end of one period.
Before each period, you can consider your offer price in several minutes. While a maximum timeof consideration is 5 minutes before periods 1, it is 3 minutes before the other periods. If the timefinished, the experimenters say, “Write your offer price on your Report Sheet and put it into yourBox.” As soon as you determine your offer price, you can submit your offer price. Don’t talk without
asking a question. In the experiments, there are some subjects in the other room. They also want tosell the good to the experimenters. The experimenters don’t inform you of the number of thesubjects. Therefore, the experimenters compare offer prices subjects not only in this room but also in
the other room submitted. Your Cost is the same in all subjects.
Next, let us explain how to fill in your Record Sheet. You compute your profit in the period as
follows and fill the number in the column of “Your Profit.”(1) If the experimenters announced that they would buy the good from you, your profit is the numberof your offer price minus Your Cost. Note that if your offer price is smaller than Your Cost, yourprofit is negative.
(2) Otherwise, your profit is zero.
For example, we assume that each subject’s Your Cost is 120 in the previous example. Subjects B
and C write zero in the column of Your Profit because the experimenters don’t announce their ID
Number. On the other hand, because the experimenters announce subject A’s ID Number, subject A
writes 10 (=130-120) in the column of Your Profit.
Finally, we explain your payoff. Your payoff depends on the sum of your profits and is computed
as follows:1300 + 10 × (the sum of your profits).
If the sum of your profits is 110, your payoff is 2400 (=1300 + 10 × 110).
When the experimenters say, “The experiment has ended,” follow their direction.
Before the actual experiment, you will do the three period practices. Your profit in the practiceperiods is not counted in your payoff. The time of considering your offer price is 3 minutes. As soon
as you determine your offer price, write it on your Report Sheet and put it into your Box.
This is the end of the instruction. If you have any questions, please ask them to the experimenters.

30

1.2 Instruction Sheet for the Outsider/Cost sessions
1.2.1 For 3 subjects
Abstract
In this experiment, we assume that you produce one unit of good in each period. If you can sell
one unit to the experimenters at your offer price, you get an amount of the offer price minus a
production cost as a profit. However, If you cannot sell the good to the experimenters, you have to
pay 7 units as a trading cost to the experimenters. In order to sell to the experimenters, because there
are some other subjects who can sell the same good, your offer price has to be satisfied with thefollowing two conditions. The first is that your offer price is equal to or lower than a price theexperimenters determined prior to the experiment. The second is that your offer price is the lowest
one in all offer prices. Your payoff is determined by a sum of your profits, and the experimenterswill pay it to you at the end of the experiment. We will explain how to determine your payoff
afterward.
During the experiments, you can talk with other subjects if the experimenters permit it. Otherwise,
don’t talk anything. Please follow the experimenters’ direction.
Explanation
Please confirm the following six sheets of papers on your desk.
・Abstract and Experiments (This sheet) ・Personal Card
・Name Plate
・Record Sheet・Box・Report Sheet (a bundle of paper) ・Experimental Procedure
First, please write your name, belongings, sex and age on your Personal Card. You will fill in yourreceipt after the experiment.
Your “ID Number” and “Your Cost” is written on your Name Plate. Your Cost is a cost that you
must spend on producing one unit of the good.
Record Sheet is used for the record of Your Cost and your profit. Please write Your Cost on your
Record Sheet. Put your Name Plate on near your neck in such a way that other subjects can see it
well.
Report Sheet is used to inform the experimenters of your offer price. Please use one piece of paperin each period. When you finish writing your offer price on your Report Sheet, please put it into your
Box.
Experimental Procedure summarizes the procedure of the experiment. Please refer it if necessary.
Let us now explain about the detailed procedure of this experiment. The experiment will continue
until the experimenters say, “The experiment has ended.” The number of periods has been alreadydetermined. But, the experimenters don’t inform you of it. When each period starts, write your offer
price on your Record Sheet in such a way that other subjects cannot see it. Your offer price you canwrite is limited in a range the experimenters will assign. If your offer price is smaller than aminimum price of the range, it will be assumed as the minimum price. If it is higher than amaximum price of the range, it will be assumed as the maximum price. Finishing writing your offer
price on your Record Sheet, put it into your Box. The experimenters collect it and determine which
subject they will buy one unit of the good from in the following manner. The experimenters havealready determined “The Highest Price.” The Highest Price is the maximum price at which theexperimenters want to buy one unit of the good. The experimenters remove offer prices that are
higher than The Highest Price. Offer prices equal to The Highest Price are not removed. The
experimenters find the lowest offer price in all prices not removed and buy one unit of the good froma subject who submitted it at the offer price. When all offer prices are higher than The Highest Price,
the experimenters don’t buy the good in the period. The Highest Price will be informed you before
the experiment starts by the backboard. The Highest Price is fixed throughout the experiment. If
your cannot sell the good to the experimenters, you have to pay 7 units as a trading cost.

31In order to understand the procedure described above, let us show a simple example. It is assumed
that 3 subjects, A, B and C submit 130, 140 and 150, respectively. The Highest Price is assumed to
be 145. First, the experimenters remove subject C’s offer price because 150 is higher than The
Highest Price. In the other offer prices, subject A’s offer price is the lowest price. So, subject A willsell one unit of the good at 130 to the experimenters. Because subjects B and C cannot sell the good,pay 7 units as a trading cost to the experimenters. Their profits in the period are –7.
When the experimenters buy the good, they say, “We will buy one unit of the good at (the lowest
offer price) from (ID Number).” In addition, they write the lowest offer price and the subject’s ID
Number on the blackboard. Please raise your hand if your ID Number is announced. If all offer
prices are higher than The Highest Price, the experimenters say, “We cannot buy the good.” If
multiple subjects submit the lowest offer price, the experimenters tell them to throw a die. If your ID
Number is announced, throw a die. The experimenters buy the good from a subject whose number ofa die is the highest. This is the end of one period.
Before each period, you can talk with other two subjects. You can talk about anything. But, you
are not allowed a physical threat. While a maximum time of talking is 5 minutes before periods 1, itis 3 minutes before the other periods. After the experimenters say, “You can talk with othersubjects,” you can start talking. If the talking time finished, the experimenters say, “Stop talking.” Assoon as you determine your offer price, you write the offer price on your Report Sheet and put it into
your Box. Don’t talk without the experimenters’ direction. In the experiments, there are somesubjects in the other room. They also want to sell the good to the experimenters. The experimenters
don’t inform you of the number of the subjects. Therefore, the experimenters compare offer prices
subjects not only in this room but also in the other room submitted. Your Cost is the same in all
subjects.
Next, let us explain how to fill in your Record Sheet. You compute your profit in the period as
follows and fill the number in the column of “Your Profit.”(1) If the experimenters announced that they would buy the good from you, your profit is the numberof your offer price minus Your Cost. Note that if your offer price is smaller than Your Cost, yourprofit is negative.
(2) Otherwise, your profit is –7.
For example, we assume that each subject’s Your Cost is 120 in the previous example. Subjects B
and C write –7 in the column of Your Profit because the experimenters don’t announce their ID
Number. On the other hand, because the experimenters announce subject A’s ID Number, subject A
writes 10 (=130-120) in the column of Your Profit.
Finally, we explain your payoff. Your payoff depends on the sum of your profits and is computed
as follows:
3300 + 10 × (the sum of your profits).
If the sum of your profits is 20, your payoff is 3500 (=3300 + 10 × 20).
When the experimenters say, “The experiment has ended,” follow their direction.
Before the actual experiment, you will do the three period practices. Please determine your offer
price without talking with other subjects only in the practice periods. Your profit in the practiceperiods is not counted in your payoff. The time of considering your offer price is 3 minutes. As soon
as you determine your offer price, write it on your Report Sheet and put it into your Box.
This is the end of the instruction. If you have any questions, please ask them to the experimenters.

32

1.2.2 For an outsider
Abstract
In this experiment, we assume that you produce one unit of good in each period. If you can sell
one unit to the experimenters at your offer price, you get an amount of the offer price minus a
production cost as a profit. However, If you cannot sell the good to the experimenters, you have to
pay 7 units as a trading cost to the experimenters. In order to sell to the experimenters, because there
are some other subjects who can sell the same good, your offer price has to be satisfied with thefollowing two conditions. The first is that your offer price is equal to or lower than a price theexperimenters determined prior to the experiment. The second is that your offer price is the lowest
one in all offer prices. Your payoff is determined by a sum of your profits, and the experimenterswill pay it to you at the end of the experiment. We will explain how to determine your payoff
afterward.
During the experiments, don’t talk anything. Please follow the experimenters’ direction.
Explanation
Please confirm the following six sheets of papers on your desk.
・Abstract and Experiments (This sheet) ・Personal Card
・Name Plate
・Record Sheet・Box・Report Sheet (a bundle of paper) ・Experimental Procedure
First, please write your name, belongings, sex and age on your Personal Card. You will fill in yourreceipt after the experiment.
Your “ID Number” and “Your Cost” is written on your Name Plate. Your Cost is a cost that you
must spend on producing one unit of the good.
Record Sheet is used for the record of Your Cost and your profit. Please write Your Cost on your
Record Sheet. Put your Name Plate on near your neck.
Report Sheet is used to inform the experimenters of your offer price. Please use one piece of paperin each period. When you finish writing your offer price on your Report Sheet, please put it into your
Box.
Experimental Procedure summarizes the procedure of the experiment. Please refer it if necessary.
Let us now explain about the detailed procedure of this experiment. The experiment will continue
until the experimenters say, “The experiment has ended.” The number of periods has been alreadydetermined. But, the experimenters don’t inform you of it. When each period starts, write your offer
price on your Record Sheet. Your offer price you can write is limited in a range the experimenterswill assign. If your offer price is smaller than a minimum price of the range, it will be assumed as theminimum price. If it is higher than a maximum price of the range, it will be assumed as the
maximum price. Finishing writing your offer price on your Record Sheet, put it into your Box. The
experimenters collect it and determine which subject they will buy one unit of the good from in thefollowing manner. The experimenters have already determined “The Highest Price.” The Highest
Price is the maximum price at which the experimenters want to buy one unit of the good. The
experimenters remove offer prices that are higher than The Highest Price. Offer prices equal to The
Highest Price are not removed. The experimenters find the lowest offer price in all prices notremoved and buy one unit of the good from a subject who submitted it at the offer price. When all
offer prices are higher than The Highest Price, the experimenters don’t buy the good in the period.
The Highest Price will be informed you before the experiment starts by the backboard. The Highest
Price is fixed throughout the experiment. If your cannot sell the good to the experimenters, you haveto pay 7 units as a trading cost.
In order to understand the procedure described above, let us show a simple example. It is assumed
that 3 subjects, A, B and C submit 130, 140 and 150, respectively. The Highest Price is assumed to
be 145. First, the experimenters remove subject C’s offer price because 150 is higher than The

33

Highest Price. In the other offer prices, subject A’s offer price is the lowest price. So, subject A willsell one unit of the good at 130 to the experimenters. Because subjects B and C cannot sell the good,pay 7 units as a trading cost to the experimenters. Their profits in the period are –7.
When the experimenters buy the good, they say, “We will buy one unit of the good at (the lowest
offer price) from (ID Number).” In addition, they write the lowest offer price and the subject’s ID
Number on the blackboard. If all offer prices are higher than The Highest Price, the experimenterssay, “We cannot buy the good.” If multiple subjects submit the lowest offer price, the experimenterstell them to throw a die. If your ID Number is announced, throw a die. The experimenters buy thegood from a subject whose number of a die is the highest. This is the end of one period.
Before each period, you can consider your offer price in several minutes. While a maximum timeof consideration is 5 minutes before periods 1, it is 3 minutes before the other periods. If the timefinished, the experimenters say, “Write your offer price on your Report Sheet and put it into yourBox.” As soon as you determine your offer price, you can submit your offer price. Don’t talk without
asking a question. In the experiments, there are some subjects in the other room. They also want tosell the good to the experimenters. The experimenters don’t inform you of the number of thesubjects. Therefore, the experimenters compare offer prices subjects not only in this room but also in
the other room submitted. Your Cost is the same in all subjects.
Next, let us explain how to fill in your Record Sheet. You compute your profit in the period as
follows and fill the number in the column of “Your Profit.”(1) If the experimenters announced that they would buy the good from you, your profit is the numberof your offer price minus Your Cost. Note that if your offer price is smaller than Your Cost, yourprofit is negative.
(2) Otherwise, your profit is –7.
For example, we assume that each subject’s Your Cost is 120 in the previous example. Subjects B
and C write –7 in the column of Your Profit because the experimenters don’t announce their ID
Number. On the other hand, because the experimenters announce subject A’s ID Number, subject A
writes 10 (=130-120) in the column of Your Profit.
Finally, we explain your payoff. Your payoff depends on the sum of your profits and is computed
as follows:
3300 + 10 × (the sum of your profits).
If the sum of your profits is 20, your payoff is 3500 (=3300 + 10 × 20).
When the experimenters say, “The experiment has ended,” follow their direction.
Before the actual experiment, you will do the three period practices. Your profit in the practiceperiods is not counted in your payoff. The time of considering your offer price is 3 minutes. As soon
as you determine your offer price, write it on your Report Sheet and put it into your Box.
This is the end of the instruction. If you have any questions, please ask them to the experimenters.

34

1.3 Instruction Sheet for the No-Outsider/No-Cost sessions
Abstract
In this experiment, we assume that you produce one unit of good in each period. If you can sell
one unit to the experimenters at your offer price, you get an amount of the offer price minus a
production cost as a profit. However, because there are some other subjects who can sell the same
good, your offer price has to be satisfied with the following two conditions in order to sell to theexperimenters. The first is that your offer price is equal to or lower than a price the experimentersdetermined prior to the experiment. The second is that your offer price is the lowest one in all offer
prices. Your payoff is determined by a sum of your profits, and the experimenters will pay it to youat the end of the experiment. We will explain how to determine your payoff afterward.
During the experiments, you can talk with other subjects if the experimenters permit it. Otherwise,
don’t talk anything. Please follow the experimenters’ direction.
Explanation
Please confirm the following six sheets of papers on your desk.
・Abstract and Experiments (This sheet) ・Personal Card
・Name Plate
・Record Sheet・Box・Report Sheet (a bundle of paper) ・Experimental Procedure
First, please write your name, belongings, sex and age on your Personal Card. You will fill in yourreceipt after the experiment.
Your “ID Number” and “Your Cost” is written on your Name Plate. Your Cost is a cost that you
must spend on producing one unit of the good.
Record Sheet is used for the record of Your Cost and your profit. Please write Your Cost on your
Record Sheet. Put your Name Plate on near your neck in such a way that other subjects can see it
well.
Report Sheet is used to inform the experimenters of your offer price. Please use one piece of paperin each period. When you finish writing your offer price on your Report Sheet, please put it into your
Box.
Experimental Procedure summarizes the procedure of the experiment. Please refer it if necessary.
Let us now explain about the detailed procedure of this experiment. The experiment will continue
until the experimenters say, “The experiment has ended.” The number of periods has been alreadydetermined. But, the experimenters don’t inform you of it. When each period starts, write your offer
price on your Record Sheet in such a way that other subjects cannot see it. Your offer price you canwrite is limited in a range the experimenters will assign. If your offer price is smaller than aminimum price of the range, it will be assumed as the minimum price. If it is higher than amaximum price of the range, it will be assumed as the maximum price. Finishing writing your offer
price on your Record Sheet, put it into your Box. The experimenters collect it and determine which
subject they will buy one unit of the good from in the following manner. The experimenters havealready determined “The Highest Price.” The Highest Price is the maximum price at which theexperimenters want to buy one unit of the good. The experimenters remove offer prices that are
higher than The Highest Price. Offer prices equal to The Highest Price are not removed. The
experimenters find the lowest offer price in all prices not removed and buy one unit of the good froma subject who submitted it at the offer price. When all offer prices are higher than The Highest Price,
the experimenters don’t buy the good in the period. The Highest Price will be informed you before
the experiment starts by the backboard. The Highest Price is fixed throughout the experiment.
In order to understand the procedure described above, let us show a simple example. It is assumed
that 3 subjects, A, B and C submit 130, 140 and 150, respectively. The Highest Price is assumed to
be 145. First, the experimenters remove subject C’s offer price because 150 is higher than The
Highest Price. In the other offer prices, subject A’s offer price is the lowest price. So, subject A will35

sell one unit of the good at 130 to the experimenters.
When the experimenters buy the good, they say, “We will buy one unit of the good at (the lowest
offer price) from (ID Number).” In addition, they write the lowest offer price and the subject’s ID
Number on the blackboard. If all offer prices are higher than The Highest Price, the experimenterssay, “We cannot buy the good.” If multiple subjects submit the lowest offer price, the experimenterstell them to throw a die. If your ID Number is announced, throw a die. The experimenters buy thegood from a subject whose number of a die is the highest. This is the end of one period.
Before each period, you can talk with other two subjects. You can talk about anything. But, you
are not allowed a physical threat. While a maximum time of talking is 5 minutes before periods 1, itis 3 minutes before the other periods. After the experimenters say, “You can talk with othersubjects,” you can start talking. If the talking time finished, the experimenters say, “Stop talking.” Assoon as you determine your offer price, you write the offer price on your Report Sheet and put it into
your Box. Don’t talk without the experimenters’ direction.
Next, let us explain how to fill in your Record Sheet. You compute your profit in the period as
follows and fill the number in the column of “Your Profit.”(1) If the experimenters announced that they would buy the good from you, your profit is the numberof your offer price minus Your Cost. Note that if your offer price is smaller than Your Cost, yourprofit is negative.
(2) Otherwise, your profit is zero.
For example, we assume that each subject’s Your Cost is 120 in the previous example. Subjects B
and C write zero in the column of Your Profit because the experimenters don’t announce their ID
Number. On the other hand, because the experimenters announce subject A’s ID Number, subject A
writes 10 (=130-120) in the column of Your Profit.
Finally, we explain your payoff. Your payoff depends on the sum of your profits and is computed
as follows:1300 + 10 × (the sum of your profits).
If the sum of your profits is 110, your payoff is 2400 (=1300 + 10 × 110).
When the experimenters say, “The experiment has ended,” follow their direction.
Before the actual experiment, you will do the three period practices. Please determine your offer
price without talking with other subjects only in the practice periods. Your profit in the practiceperiods is not counted in your payoff. The time of considering your offer price is 3 minutes. As soon
as you determine your offer price, write it on your Report Sheet and put it into your Box.
This is the end of the instruction. If you have any questions, please ask them to the experimenters.

36

1.4 Instruction Sheet for the No-Outsider/Cost sessions
Abstract
In this experiment, we assume that you produce one unit of good in each period. If you can sell
one unit to the experimenters at your offer price, you get an amount of the offer price minus a
production cost as a profit. However, If you cannot sell the good to the experimenters, you have to
pay 7 units as a trading cost to the experimenters. In order to sell to the experimenters, because there
are some other subjects who can sell the same good, your offer price has to be satisfied with thefollowing two conditions. The first is that your offer price is equal to or lower than a price theexperimenters determined prior to the experiment. The second is that your offer price is the lowest
one in all offer prices. Your payoff is determined by a sum of your profits, and the experimenterswill pay it to you at the end of the experiment. We will explain how to determine your payoff
afterward.
During the experiments, you can talk with other subjects if the experimenters permit it. Otherwise,
don’t talk anything. Please follow the experimenters’ direction.
Explanation
Please confirm the following six sheets of papers on your desk.
・Abstract and Experiments (This sheet) ・Personal Card
・Name Plate
・Record Sheet・Box・Report Sheet (a bundle of paper) ・Experimental Procedure
First, please write your name, belongings, sex and age on your Personal Card. You will fill in yourreceipt after the experiment.
Your “ID Number” and “Your Cost” is written on your Name Plate. Your Cost is a cost that you
must spend on producing one unit of the good.
Record Sheet is used for the record of Your Cost and your profit. Please write Your Cost on your
Record Sheet. Put your Name Plate on near your neck in such a way that other subjects can see it
well.
Report Sheet is used to inform the experimenters of your offer price. Please use one piece of paperin each period. When you finish writing your offer price on your Report Sheet, please put it into your
Box.
Experimental Procedure summarizes the procedure of the experiment. Please refer it if necessary.
Let us now explain about the detailed procedure of this experiment. The experiment will continue
until the experimenters say, “The experiment has ended.” The number of periods has been alreadydetermined. But, the experimenters don’t inform you of it. When each period starts, write your offer
price on your Record Sheet in such a way that other subjects cannot see it. Your offer price you canwrite is limited in a range the experimenters will assign. If your offer price is smaller than aminimum price of the range, it will be assumed as the minimum price. If it is higher than amaximum price of the range, it will be assumed as the maximum price. Finishing writing your offer
price on your Record Sheet, put it into your Box. The experimenters collect it and determine which
subject they will buy one unit of the good from in the following manner. The experimenters havealready determined “The Highest Price.” The Highest Price is the maximum price at which theexperimenters want to buy one unit of the good. The experimenters remove offer prices that are
higher than The Highest Price. Offer prices equal to The Highest Price are not removed. The
experimenters find the lowest offer price in all prices not removed and buy one unit of the good froma subject who submitted it at the offer price. When all offer prices are higher than The Highest Price,
the experimenters don’t buy the good in the period. The Highest Price will be informed you before
the experiment starts by the backboard. The Highest Price is fixed throughout the experiment. If
your cannot sell the good to the experimenters, you have to pay 7 units as a trading cost.

37In order to understand the procedure described above, let us show a simple example. It is assumed
that 3 subjects, A, B and C submit 130, 140 and 150, respectively. The Highest Price is assumed to
be 145. First, the experimenters remove subject C’s offer price because 150 is higher than The
Highest Price. In the other offer prices, subject A’s offer price is the lowest price. So, subject A willsell one unit of the good at 130 to the experimenters. Because subjects B and C cannot sell the good,pay 7 units as a trading cost to the experimenters. Their profits in the period are –7.
When the experimenters buy the good, they say, “We will buy one unit of the good at (the lowest
offer price) from (ID Number).” In addition, they write the lowest offer price and the subject’s ID
Number on the blackboard. If all offer prices are higher than The Highest Price, the experimenterssay, “We cannot buy the good.” If multiple subjects submit the lowest offer price, the experimenterstell them to throw a die. If your ID Number is announced, throw a die. The experimenters buy thegood from a subject whose number of a die is the highest. This is the end of one period.
Before each period, you can talk with other two subjects. You can talk about anything. But, you
are not allowed a physical threat. While a maximum time of talking is 5 minutes before periods 1, itis 3 minutes before the other periods. After the experimenters say, “You can talk with othersubjects,” you can start talking. If the talking time finished, the experimenters say, “Stop talking.” Assoon as you determine your offer price, you write the offer price on your Report Sheet and put it into
your Box. Don’t talk without the experimenters’ direction.
Next, let us explain how to fill in your Record Sheet. You compute your profit in the period as
follows and fill the number in the column of “Your Profit.”(1) If the experimenters announced that they would buy the good from you, your profit is the numberof your offer price minus Your Cost. Note that if your offer price is smaller than Your Cost, yourprofit is negative.
(2) Otherwise, your profit is –7.
For example, we assume that each subject’s Your Cost is 120 in the previous example. Subjects B
and C write –7 in the column of Your Profit because the experimenters don’t announce their ID
Number. On the other hand, because the experimenters announce subject A’s ID Number, subject A
writes 10 (=130-120) in the column of Your Profit.
Finally, we explain your payoff. Your payoff depends on the sum of your profits and is computed
as follows:
3300 + 10 × (the sum of your profits).
If the sum of your profits is 20, your payoff is 3500 (=3300 + 10 × 20).
When the experimenters say, “The experiment has ended,” follow their direction.
Before the actual experiment, you will do the three period practices. Please determine your offer
price without talking with other subjects only in the practice periods. Your profit in the practiceperiods is not counted in your payoff. The time of considering your offer price is 3 minutes. As soon
as you determine your offer price, write it on your Report Sheet and put it into your Box.
This is the end of the instruction. If you have any questions, please ask them to the experimenters.

38

2 Experimental Procedure
2.1 For those who are not outsiders
The instruction of the experiment by a tape recorder (The experimenters control a tape recorder.)↓Time for questions↓
Practice
1) The experimenters say, “Please start the first period of practice.”2) When you determine your offer price, you write it on your Report Sheet and put it into your Box
in such a way that other subjects cannot your offer price. (If the time finishes, the experimenterssay, “Write your offer price on your Report Sheet and put it into your Box.”)3) The experimenters collect your Report Sheet and determine a subject who can sell the good. Theysay, “We will buy one unit of the good at (the lowest offer price) from (ID Number).” If your ID
Number is announced, raise your hand.
4) You compute your profit and write it on your Record Sheet.
* Practice consists of three periods.
↓
Time for questions↓
Actual experiment
1) An experimenter says, “You can talk with other subjects.”
2) You can talk with other subjects in 5 minutes. (If the time finishes, the experimenters say, “Write
your offer price on your Report Sheet and put it into your Box.”)3) When you determine your offer price, you write it on your Report Sheet and put it into your Box
in such a way that other subjects cannot your offer price.
4) The experimenters collect your Report Sheet and determine a subject who can sell the good. Theysay, “We will buy one unit of the good at (the lowest offer price) from (ID Number).” If your ID
Number is announced, raise your hand.
5) You compute your profit and write it on your Record Sheet.
* The periods are repeated until the experimenters say, “The experiment has ended.” In period 2 andthe subsequent periods, the time of talking is 3 minutes.
↓
After the experiment
1) You hand in your Record Sheet to the experimenters and write your address and name on yourReceipt. When the experimenters give you an Answer Sheet, you fill it in.
2) Because the experimenters pay one subject’s payoff in one time, you wait until your ID Number
is called.
3) When your ID Number is called, you go to the experimenters with your Personal Card andAnswer Sheet.
4) You write the amount of your payoff on your Receipt and sign on it. You receive your payoff.

39

2.2 For outsiders
The instruction of the experiment by a tape recorder (The experimenters control a tape recorder.)↓Time for questions↓
Practice
1) The experimenters say, “Please start the first period of practice.”2) When you determine your offer price, you write it on your Report Sheet and put it into your Box
in such a way that other subjects cannot your offer price. (If the time finishes, the experimenterssay, “Write your offer price on your Report Sheet and put it into your Box.”)3) The experimenters collect your Report Sheet and determine a subject who can sell the good. Theysay, “We will buy one unit of the good at (the lowest offer price) from (ID Number).”4) You compute your profit and write it on your Record Sheet.
* Practice consists of three periods.
↓
Time for questions↓
Actual experiment
1) An experimenter says, “Consider your offer price.”2) You can consider it in 5 minutes. (If the time finishes, the experimenters say, “Write your offer
price on your Report Sheet and put it into your Box.”)3) When you determine your offer price, you write it on your Report Sheet and put it into your Box.
4) The experimenters collect your Report Sheet and determine a subject who can sell the good. Theysay, “We will buy one unit of the good at (the lowest offer price) from (ID Number).”5) You compute your profit and write it on your Record Sheet.
* The periods are repeated until the experimenters say, “The experiment has ended.” In period 2 andthe subsequent periods, the time of talking is 3 minutes.
↓
After the experiment3) You hand in your Record Sheet to the experimenters and write your address and name on yourReceipt. When the experimenters give you an Answer Sheet, you fill it in.
4) Because the experimenters pay one subject’s payoff in one time, you wait until your ID Number
is called.
5) When your ID Number is called, you go to the experimenters with your Personal Card andAnswer Sheet.
6) You write the amount of your payoff on your Receipt and sign on it. You receive your payoff.

40

3. Record Sheet
3.1 For the Outsider/No-Cost sessions
Record Sheet
ID NumberYour Cost

For PracticeYour Profit
Period 1
Period 2
Period 3
For Actual ExperimentYour Profit
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
Period 8
Period 9
Period 10
Period 11
Period 12
Period 13
Period 14
Period 15
Don’t fill →Your Profit
Period 16
Period 17
Period 18
Period 19
Period 20
Period 21
Period 22
Period 23
Period 24
Period 25
Period 26
Period 27
Period 28
Period 29
Period 30
The sum ofYour Profits

Don’t fill the following.

1300 + 10 ×=(The sum of Your Profits)

41

yen

3.2 For the Outsider/Cost sessions
Record Sheet
ID NumberYour Cost

Note: The trading cost is –7.
For PracticeYour Profit
Period 1
Period 2
Period 3
For Actual ExperimentYour Profit
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
Period 8
Period 9
Period 10
Period 11
Period 12
Period 13
Period 14
Period 15
Don’t fill →Your Profit
Period 16
Period 17
Period 18
Period 19
Period 20
Period 21
Period 22
Period 23
Period 24
Period 25
Period 26
Period 27
Period 28
Period 29
Period 30
The sum ofYour Profits

Don’t fill the following.

3300 + 10 ×=(The sum of Your Profits)

42

yen

3.3 For the No-Outsider/No-Cost sessions
Record Sheet
ID NumberYour Cost

For PracticeYour Profit
Period 1
Period 2
Period 3
For Actual ExperimentYour Profit
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
Period 8
Period 9
Period 10
Period 11
Period 12
Period 13
Period 14
Period 15
Don’t fill →Your Profit
Period 16
Period 17
Period 18
Period 19
Period 20
Period 21
Period 22
Period 23
Period 24
Period 25
Period 26
Period 27
Period 28
Period 29
Period 30
The sum ofYour Profits

Don’t fill the following.

800 + 10 ×=(The sum of Your Profits)

43

yen

3.4 For the No-Outsider/Cost sessions
Record Sheet
ID NumberYour Cost

Note: The trading cost is –7.
For PracticeYour Profit
Period 1
Period 2
Period 3
For Actual ExperimentYour Profit
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
Period 8
Period 9
Period 10
Period 11
Period 12
Period 13
Period 14
Period 15
Don’t fill →Your Profit
Period 16
Period 17
Period 18
Period 19
Period 20
Period 21
Period 22
Period 23
Period 24
Period 25
Period 26
Period 27
Period 28
Period 29
Period 30
The sum ofYour Profits

Don’t fill the following.

2000 + 10 ×=(The sum of Your Profits)

44

yen

4 Answer Sheet
4.1 Answer Sheet for the Outsider/No-Cost sessions
4.1.1 For 3 subjects
Answer SheetYour ID Number:Your Name:

1. Did you understand a procedure and a rule of the experiment before period 1? If you understoodthem at period 1, answer “Period 1.” Otherwise, answer the period you understood them at.

Period ()

If there was anything you didn’t understand at period 1, write them below.

2. Under the situation that there were other subjects in the separate room, which offer price did you
think the best one to submit is? Answer the concrete number of offer prices. Did you actuallysubmit the best offer price? If you didn’t submit the best one, why did you do so? Write theanswer below.

3. If the other subjects were not in the separate room, which offer price would you think the best one
to submit is? Write the answer (including a concrete number of the offer price) below.

4. What did you talk with other subjects? If you determined your offer price on the basis of thecontents of the communication, why did you determine the offer price? Write the answer(including a concrete number of the offer price) below.

5. Write anything (e.g., your impression of the experiments) below.

Thank you very much for participating in our experiment and for answering this sheet. If you havean extra space for answering the above questionnaires, please use the opposite side of this sheet.

45

4.1.2 For an outsider
Answer SheetYour ID Number:Your Name:

1. Did you understand a procedure and a rule of the experiment before period 1? If you understoodthem at period 1, answer “Period 1.” Otherwise, answer the period you understood them at.

Period ()

If there was anything you didn’t understand at period 1, write them below.

2. Under the situation that there were other subjects in the separate room, which offer price did you
think the best one to submit is? Answer the concrete number of offer prices. Did you actuallysubmit the best offer price? If you didn’t submit the best one, why did you do so? Write theanswer below.

3. If the other subjects were not in the separate room, which offer price would you think the best one
to submit is? Write the answer (including a concrete number of the offer price) below.

4. Write anything (e.g., your impression of the experiments) below.

Thank you very much for participating in our experiment and for answering this sheet. If you havean extra space for answering the above questionnaires, please use the opposite side of this sheet.

46

4.2 Answer Sheet for the Outsider/Cost sessions
4.2.1 For 3 subjects
Answer SheetYour ID Number:Your Name:

1. Did you understand a procedure and a rule of the experiment before period 1? If you understoodthem at period 1, answer “Period 1.” Otherwise, answer the period you understood them at.

Period ()

If there was anything you didn’t understand at period 1, write them below.

2. Under the situation that there were other subjects in the separate room, which offer price did you
think the best one to submit is? Answer the concrete number of offer prices. Did you actuallysubmit the best offer price? If you didn’t submit the best one, why did you do so? Write theanswer below.

3. If the other subjects were not in the separate room, which offer price would you think the best one
to submit is? Write the answer (including a concrete number of the offer price) below.

4. How did the trading cost of –7 influence on your determination of your offer price? If it has any
effects on your determination of your offer price, how did you behave against it?

5. What did you talk with other subjects? If you determined your offer price on the basis of thecontents of the communication, why did you determine the offer price? Write the answer(including a concrete number of the offer price) below.

6. Write anything (e.g., your impression of the experiments) below.

Thank you very much for participating in our experiment and for answering this sheet. If you havean extra space for answering the above questionnaires, please use the opposite side of this sheet.

47

4.2.2 For an outsider
Answer SheetYour ID Number:Your Name:

1. Did you understand a procedure and a rule of the experiment before period 1? If you understoodthem at period 1, answer “Period 1.” Otherwise, answer the period you understood them at.

Period ()

If there was anything you didn’t understand at period 1, write them below.

2. Under the situation that there were other subjects in the separate room, which offer price did you
think the best one to submit is? Answer the concrete number of offer prices. Did you actuallysubmit the best offer price? If you didn’t submit the best one, why did you do so? Write theanswer below.

3. If the other subjects were not in the separate room, which offer price would you think the best one
to submit is? Write the answer (including a concrete number of the offer price) below.

4. How did the trading cost of –7 influence on your determination of your offer price? If it has any
effects on your determination of your offer price, how did you behave against it?

5. Write anything (e.g., your impression of the experiments) below.

Thank you very much for participating in our experiment and for answering this sheet. If you havean extra space for answering the above questionnaires, please use the opposite side of this sheet.

48

4.3 Answer Sheet for the No-Outsider/No-Cost sessions
Answer SheetYour ID Number:Your Name:

1. Did you understand a procedure and a rule of the experiment before period 1? If you understoodthem at period 1, answer “Period 1.” Otherwise, answer the period you understood them at.

Period ()

If there was anything you didn’t understand at period 1, write them below.

2. Which offer price did you think the best one to submit is? Answer the concrete number of offer
prices. Did you actually submit the best offer price? If you didn’t submit the best one, why did
you do so? Write the answer below.

3. What did you talk with other subjects? If you determined your offer price on the basis of thecontents of the communication, why did you determine the offer price? Write the answer(including a concrete number of the offer price) below.

4. Write anything (e.g., your impression of the experiments) below.

Thank you very much for participating in our experiment and for answering this sheet. If you havean extra space for answering the above questionnaires, please use the opposite side of this sheet.

49

4.4 Answer Sheet for the No-Outsider/Cost sessions
Answer SheetYour ID Number:Your Name:

1. Did you understand a procedure and a rule of the experiment before period 1? If you understoodthem at period 1, answer “Period 1.” Otherwise, answer the period you understood them at.

Period ()

If there was anything you didn’t understand at period 1, write them below.

2. Which offer price did you think the best one to submit is? Answer the concrete number of offer
prices. Did you actually submit the best offer price? If you didn’t submit the best one, why did
you do so? Write the answer below.

3. What did you talk with other subjects? If you determined your offer price on the basis of thecontents of the communication, why did you determine the offer price? Write the answer(including a concrete number of the offer price) below.

4. How did the trading cost of –7 influence on your determination of your offer price? If it has any
effects on your determination of your offer price, how did you behave against it?

5. Write anything (e.g., your impression of the experiments) below.

Thank you very much for participating in our experiment and for answering this sheet. If you havean extra space for answering the above questionnaires, please use the opposite side of this sheet.

505. Offer Prices
5.1 The Outsider/No-Cost sessions (The Ceiling Price: 115)
Session 1
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
104 102 101 101 102 102 102 102 102 102 101 102 102 102 102 102 101 105 101 102 102 101 101 101 101 101 101
100
105 100 102 102 103 102 105 100 100 100 102 101 103 100 101 100 100 100 102 105 100 100 100 100 100 100 101
100
105 105 103 101 101 101 101 102 101 100 110 101 101 101 101 101 100 101 101 101 101 101 101 101 100 101 100
100
101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 101 115
100

Session 2
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
111 104 105 102 103 105 104 102 103 104 103 105 104 104 104 104 105 105 106 105 106 106 106 106 106 106 107100
108 106 105 105 105 103 104 103 103 103 103 104 103 104 104 104 105 105 105 105 105 106 106 106 106 106 107100
107 110 110 110 110 110 104 103 102 103 103 104 104 104 104 104 105 105 105 106 106 106 106 106 106 106 107
100
112 105 102 102 103 103 102 103 103 102 103 103 104 103 104 104 104 105 105 105 105 105 106 106 106 107 107
100

Session 3
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
115 101 103 103 101 102 103 103 103 103 103 102 102 102 102 102 102 102 103 103 102 103 102 102 102 102 102
100
115 101 101 104 102 102 104 104 103 103 103 102 102 102 102 102 103 102 103 103 103 103 102 101 101 101 101
100
115 101 107 107 102 102 105 105 105 103 103 103 103 103 103 103 103 103 103 102 102 103 102 102 102 102 102
100
102 105 104 102 103 103 101 102 103 105 103 104 103 102 102 102 102 102 102 103 103 103 103 103 102 102 101
100

Session 4
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
105 101 102 101 101 101 115 100 100 100 100 102 100 109 102 101 101 101 101 101 101 101 101 101 101 101 101
100
105 101 100 101 101 101 101 101 101 101 101 102 101 103 101 102 101 101 101 101 101 101 101 101 101 101 101
100
103 105 105 103 102 102 102 103 102 103 105 104 105 110 110 105 110 102 102 102 103 105 102 101 102 102 101
100
107 101 101 101 101 101 101 101 101 100 100 101 101 101 101 100 101 101 101 100 100 101 101 101 101 101 101
100

Session 5
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
109 102 102 102 103 102 103 103 103 103 103 103 103 104 103 103 103 103 103 103 103 103 102 103 103 102 102
100
111 107 103 103 103 102 103 103 103 103 103 103 103 103 103 103 104 103 101 103 103 103 103 103 103 103 103
100
110 110 110 110 103 102 103 103 102 104 103 104 103 103 104 103 103 103 104 102 103 103 103 103 103 103 103
100
102 101 105 102 101 102 102 102 103 102 103 102 103 103 103 103 103 103 104 102 102 102 103 102 102 103 103
100
51

5.2 The Outsider/Cost sessions (The Ceiling Price: 115 in session 1, 125 in sessions 2, 3, 4 and 5)
Session 1
Subject 1
Subject 2
Subject 3
Outsider

1
100
100
100
102

2
99
97
97
98

3
95
95
94
95

4
94
94
95
92

5
94
94
95
93

6
94
94
93
94

7
94
94
94
93

8
94
94
94
94

9
94
94
94
94

10
95
95
95
95

11
94
94
95
96

12
94
94
94
95

13
94
94
95
94

14
94
94
94
94

Session 2
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
113 107 110 105 110 108 107 109 108 108 110 110 112 112 112 112 113 114 113 114 115 115 115 114 114 115 115110
115 106 105 108 112 110 107 109 108 108 110 110 112 111 112 114 113 114 114 114 114 115 115 115 115 115 115
110
111 104 110 105 115 110 111 110 108 108 111 110 111 111 112 113 113 114 114 114 115 115 116 116 115 115 116
110
105 108 107 107 106 107 109 107 108 109 109 110 110 111 112 112 113 113 114 114 114 115 114 115 115 115 115
110

Session 3
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
108 109 105 104 104 104 104 104 120 104 104 114 104 122 104 119 104 118 104 117 104 112 104 121 104 116 104
110
112 105 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104110
111 110 104 104 104 104 104 103 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104110
109 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104
110

Session 4
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
105 105 104 104 104 104 104 104 115 110 104 104 104 104 104 104 110 110 110 110 110 110 105 104 105 105 105
110
111 110 105 103 104 104 103 103 110 105 106 106 104 104 104 105 105 105 105 105 105 105 105 105 105 104 105
110
104 109 104 104 104 110 104 105 107 110 105 104 105 111 111 111 105 105 104 111 105 105 110 105 105 105 105110
105 104 104 107 105 104 105 104 104 104 104 104 104 104 104 105 104 104 105 104 104 105 104 105 104 104 104
110

Session 5
Subject 1
Subject 2
Subject 3
Outsider

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
111 111 125 111 110 110 105 105 105 105 105 105 105 105 105 125 125 125 125 145 145 125 125 125 125 125 125110
110 111 109 109 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105110
115 112 109 108 105 105 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104110
110 110 110 107 106 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104 104
110

52

15
94
94
94
94

16
94
94
94
94

17
94
94
94
93

18
94
94
94
94

19
94
94
94
94

20
95
95
95
94

21
94
94
94
94

22
94
94
94
94

23
94
94
94
94

24
94
94
94
94

25
94
94
94
93

26
94
94
94
94

27 Your Cost
94
100
94
100
94
100
94
100

5.3 The No-Outsider/No-Cost sessions (The Ceiling Price: 115 in sessions 1, 2 and 3, 125 in sessions 4 and 5)
Session 1
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
108 108 105 110 105 104 108 108 106 105 105 105 107 106 115 108 105 104 104 115 115 115 110 110 110 115 106100
105 106 111 109 107 107 115 105 106 104 105 107 105 105 115 115 104 103 107 115 115 115 111 112 110 115 105100
107 107 105 106 108 107 107 109 106 107 105 107 107 106 115 105 105 105 105 115 115 115 110 110 112 115 110
100

Session 2
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
115 120 120 115 115 115 115 115 115 115 115 120 115 120 120 115 115 115 115 115 115 115 115 120 115 120 120
100
115 115 115 115 120 120 115 115 120 115 120 120 115 115 115 115 120 120 115 120 120 115 115 115 115 115 120100
115 115 120 115 115 135 115 135 116 115 115 115 115 115 118 115 115 123 115 115 135 115 115 120 115 115 115
100

Session 3
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
116 117 115 118 119 115 120 121 115 122 123 115 124 125 115 126 127 115 128 129 115 115 115 115 115 115 115
100
120 115 120 120 115 120 120 115 120 120 115 120 120 115 120 120 115 120 120 115 120 115 115 115 115 115 115100
115 250 120 115 117 120 115 130 135 115 123 132 115 120 127 115 118 116 115 120 122 115 115 115 115 115 115
100

Session 4
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
125 127 130 125 140 140 125 130 130 125 130 130 125 130 130 125 130 130 125 135 135 125 140 140 125 140 140110
145 125 126 130 125 144 141 125 129 130 125 132 130 125 135 130 125 135 145 125 133 130 125 132 130 125 140110
130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125
110

Session 5
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
130 130 125 135 138 125 126 127 125 138 140 125 142 127 125 129 132 125 139 140 125 128 135 125 140 130 125110
126 125 128 130 125 130 130 125 130 130 125 135 130 125 145 126 125 130 130 125 130 130 125 130 130 125 130110
125 145 126 125 126 140 125 145 126 125 129 130 125 145 140 125 127 129 125 127 126 125 128 130 125 126 139
110

53

5.4 The No-Outsider/Cost sessions (The Ceiling Price: 125)
Session 1
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
125 110 109 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 106 125 105 106 104 130110
125 106 104 126 125 126 126 125 126 126 125 126 126 125 126 126 125 126 126 125 124 108 104 110 105 104 125110
122 119 111 129 126 125 126 126 125 126 126 125 126 126 125 126 126 125 126 126 125 118 104 104 104 104 126
110

Session 2
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
125 130 130 125 130 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130110
130 125 130 130 125 130 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125110
130 130 125 130 130 125 130 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130
110

Session 3
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
120 115 117 125 135 140 125 130 140 125 135 135 125 135 140 125 135 145 125 145 145 125 135 140 125 135 140110
115 120 115 126 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 130 130 125 138110
120 117 115 130 145 125 130 130 125 126 135 125 130 130 125 128 130 125 130 130 125 130 130 125 130 130 125
110

Session 4
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
118 115 115 119 119 119 125 120 119 125 119 120 125 120 120 125 120 120 125 120 120 125 120 120 125 120 120
110
112 114 113 120 119 121 125 118 120 125 120 118 125 119 118 125 120 119 125 121 121 125 119 120 125 119 120
110
115 111 115 118 120 120 125 120 119 125 120 120 125 119 118 125 120 121 125 120 119 125 121 119 125 120 120
110

Session 5
Subject 1
Subject 2
Subject 3

1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Your Cost
145 125 145 125 145 145 113 109 107 125 145 145 145 145 125 125 125 125 125 110 107 145 145 125 125 125 125110
125 145 143 137 127 125 117 111 105 138 144 125 125 126 134 125 125 125 125 117 119 145 125 127 125 125 124110
127 130 125 130 125 130 112 114 108 130 125 130 130 125 130 125 125 125 115 112 108 125 130 130 125 125 125110

54