We use an experiment to study whether market competition can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under careful conditions, market competition can indeed reduce anomalous behaviour in games.
market competition market selection hypothesis auctions bounded-rationality red hat puzzle