Does Fairness Constrain Profit Maximization? New Evidence from a Dictator Monopoly Experiment

In seminal contributions, Kahneman, Knetsch and Thaler (1986a, 1986b) introduce dictator games and questionnaires to investigate whether fairness constrains profit maximization. They find that fairness does matter in dividing monetary gains. This is important because standard microeconomic models do not take fairness into account and therefore are deficient and, as Kahneman et al. (1986, p. S286) put it, embarrassingly so. The question that this paper takes up is whether the standard dictator exchange game is too simple to adequately address the question Kahneman et al. pose. We show that the standard ultimatum/dictator exchange games implicitly assume perfectly inelastic demand, an assumption, we argue, that is far too restrictive to support broad conclusions about profit maximization in general and about the restraint of fairness on profit maximization in particular. We argue that the question at least must be investigated in the context of the simple models of profit maximization that are criticized. This paper introduces a new experimental design based on a more general demand specification defining a dictator monopoly. Results from initial rounds are similar to those of standard dictator games with significant sharing in evidence. As rounds progress, however, dictator monopolists take more, until finally they take it all. This strongly suggests that agents making decisions within a more complex microeconomic setting, even as simple as the one in this paper, respond quite differently than they do when deciding on the simple division of a windfall gain