Comments on Plott and on Kahneman, Knetsch and Thaler.

This article comments on the research works of Charles Plott, D. Kahneman, J. Knetsch and R. Thaler concerning the factors that determine market outcomes. The Kahneman, Knetsch, and Thaler paper explores whether the introduction of fairness can help explain behavior by firms that could not be easily explained by standard economic analyses. The summary of experimental economic evidence presented by Charles Plott suggests that market models based on rational choice principles do rather well for a certain class of problems but that there are a number of areas where the jury is still out. The importance of Kahneman et al. paper is that it lays out a set of testable propositions that are based on the deviations between a new transaction from a reference transaction. On the basis of these propositions the authors offer testable hypotheses such as firms will not raise prices if there is an increase in demand unaccompanied by an increase in cost, will not introduce an auction as a method of allocating scarce consumer goods, and will not cut wages of existing employees if there is excess supply of labor. According to Kahneman et al., firms will not follow these and other practices because customers or employees consider them to be unfair, and hence firms may be hurt sufficiently in the future to offset any short-run gains they may achieve.