An Economics Wind Tunnel: The Science of Business Engineering

Abstract

Companies are starting to capitalize on the potential of experimental economics as a decision-making tool. Hewlett-Packard (HP) is one of such pioneering companies. Experiments, conducted at HP Labs, were used to test retailer contract policies in three areas: return, minimum advertised-price (MAP), and market development funds. The experimental design models the multifaceted contemporary market of consumer computer products. While the model is quite complex, participants were found to be effective decisions-makers and that their behavior is sensitive to variations in policies. Based on the experimental results, HP changed its policies; for example, it made the consequences for minimum advertisement price violations forward-looking as well as backward-looking. This line of research appears promising for complex industrial environments. In addition, methodological issues are discussed in the context of differences between business and academic economics experiments. Finally, the author speculates about potential future business applications.

Citation

Chen, K.-Y. (2005), "An Economics Wind Tunnel: The Science of Business Engineering", Morgan, J. (Ed.) Experimental and Behavorial Economics (Advances in Applied Microeconomics, Vol. 13), Emerald Group Publishing Limited, Leeds, pp. 133-167. https://doi.org/10.1016/S0278-0984(05)13006-5