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  HP Labs Experimental Economics Research

HP Labs established the first industrial experimental economics research program in 1994. Human subjects, paid by their performances, were used to study a wide variety of economics scenarios. Much of this research has been transferred into and use by many HP business organizations.

Research in this program has been featured in publications like The Wall Street Journal, Financial Times, Newsweek and Scientific American.

Research can be roughly divided into several areas.

» Behavioral Research in Supply Chain Management
» Information Aggregation
» Reputation experiments
» Quantum Game Theory

Behavioral Research in Supply Chain Management

One primary area is the use of experimental methods to help HP business divisions design "good" contracts and policies in their distribution channels. This work has resulted in a series of experiments (1999-2001) examining contract terms from return policies to minimum advertise price policies. These experiments have provided HP business divisions with valuable information to make better policy decisions. In 2004, we finished a project to help HP's printer division to define a new reseller program, which was rolled out Dec 2004.

In a 2003 project, in collaboration with Ford Research Lab, experimental methods were used to study the interaction between lease contracts that embed an option to purchase and an underlying used-goods market. Experiments, with subjects playing roles of heterogeneous consumer, have confirmed features predicted by a corresponding theoretical model. One such interesting feature is how the used-goods market will expand or shrink as a result of changes in strike prices. In 2004, a modified version of this model was used to analyze and validate a new Ford supply chain restructuring initiative. This new program was rolled out in summer 2004.

Recently, we started to work with HP US consumer marketing to help design rebate policies and also with IPG commercial channel to harmonize revenue targets, shipment forecasting and ordering behavior.

Relevant papers:

Kay-Yut Chen, "An Economics Wind Tunnel: The Science of Business Engineering", Chapter 6, Experimental and Behavioral Economics - Advances in Applied Microeconomics", Volume 13, edited by John Morgan, Elsevier Press, 2005.

Kay-Yut Chen and Suzhou Huang, "Durable Goods Lease Contracts and Used-Goods Market Behavior: An Experimental Study", Chapter 1, Experimental Business Research vol 2: Economics and Managerial Perspectives, edited by Amnon Rapoport and Rami Zwick, Springer, 2005.

» Kay-Yut Chen and Ren Wu, "Computer Games and Experimental Economics", In the proc. of ICEIS Apr 2003. (PDF, 503KB)

» Gary Charness and Kay-Yut Chen, "Minimum Advertised Price Policy Rules and Retailer Behavior: An Experiment", Interfaces, special issue on Experimental Economics, Sep-Oct, 2002.
(PDF, 146KB)

Kay-Yut Chen, Murat Kaya and Ozalp Ozer, "Dual Sales Channel Management with Service Competition: Analytical Analysis and Behavioral Experiments", Dec 2006.

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Information Aggregation

Another area of interests is information aggregation. From 1996 to 1999, in collaboration with Caltech, a series of field experiments were conducted within HP. Markets of Arrow-Debreu securities were used to forecast various business events such as sales of certain products. This research shows the potential of using economics mechanisms as forecasting tools. In 2001, a new information aggregation mechanism for small groups was developed in collaboration with the Information Dynamics Lab. Laboratory experiments have shown that this new mechanism can outperform markets significantly when information is independent and private across individuals. We also have developed an extension to the mechanism that will identify and aggregate a mixture of private and public information. Since then, this method has been turned into a business process and rolled out in multiple organizations.

Relevant papers:

» Kay-Yut Chen and Tad Hogg, "Aggregating Diffuse Information with Subgroups", in the proc. of IADIS E-Commerce Conf, Dec 2004. (PDF, 163KB)

» Kay-Yut Chen, Leslie Fine and Bernardo Huberman, "Eliminating Public Knowledge Biases in Small Group Predictions", Management Science, Volume 50, Number 7, pp. 983-994, July 2004. (PDF, 282KB)

» Kay-Yut Chen, Leslie Fine and Bernardo Huberman, "Predicting the Future", Information System Frontier, 5:1, 47-61, Jan 2003. (PDF, 385KB)

» Kay-Yut Chen and Charles R. Plott, "Information Aggregation Mechanisms: Concept, Design, and Implementation for a Sales Forecasting Problem", working paper, Mar 2002. (PDF, 217KB)

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Reputation experiments

A series of experiments were conducted to study how information policies (one of which is an eBay-like feedback mechanism) affect the formation of reputation in the context of a double sided market economy. We have been able to show that subjects responded strategically to different information policies.

Relevant paper:

» Kay-Yut Chen and Tad Hogg, "Experimental Evaluation of an eBay-Style Self-Reporting Reputation Mechanism", In the proc. of the Workshop for Internet and Network Economics, Hong Kong, Dec 2005. (PDF, 89KB)

» Kay-Yut Chen, Tad Hogg and Nathan Wozny, "Experimental Study of Market Reputation Mechanisms", In the proc. of ACM E-Commerce Conf, May 2004. (PDF, 32KB)

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Quantum Game Theory

The mathematics of quantum mechanics can be used to broaden the strategic space of conventional games, which can help to induce more efficient outcomes. We have designed a quantum mechanism to solve the free-rider problem in the context of a one-shot n-player public goods game with no trusted third party to enforce contributions. We have shown that the Nash equilibrium of this mechanism approaches the efficient outcome. In addition, the mechanisms we considered can be implemented with technologies in the near future. After publishing our results in a 2002 paper, we followed up with experimental work (with simulated quantum devices), testing whether human subjects, with no formal training in quantum physics, can play quantum games well. These are the first experiments of real people playing quantum games. We found that people could play close to what theory predicts with the help of a well-designed software training system in the context a simple quantum public goods game.

We are currently pursuing the research in two directions. On one hand, we are exploring new applications based on quantum information processing technologies such as new forms of auctions. On the other hand, we are expanding the experimental study to expand our understanding of how people play quantum games in different scenarios.

Relevant papers:

» Kay-Yut Chen, Tad Hogg and Bernardo Huberman, "Behavior of Multi-Agent Protocols using Quantum Entanglement", forthcoming in AAAI-2007 Spring Symposium on "Quantum Interaction".
(PDF, 80KB)

» Kay-Yut Chen and Tad Hogg, "How Well Do People Play a Quantum Prisoner's Dilemma?", Forthcoming in Quantum Information Processing, 2006. (PDF, 195KB)

» Kay-Yut Chen, Tad Hogg and Raymond Beausoleil, "A Quantum Treatment of Public Goods Economics", Quantum Information Processing , Volume 1, Issue 6, pp. 449-469, December 2002. (PDF, 203KB)

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