If you run a business, you probably want to know how your customers think, feel, and behave. What motivates them to buy your products or services? How do they react to changes in prices, features, or marketing strategies? How do they perceive your brand and your competitors? These are some of the questions that experimental economics can help you answer.
Experimental economics is a branch of economics that uses controlled experiments to test theories and hypotheses about human behavior in various situations. Unlike traditional economics, which often relies on abstract models and assumptions, experimental economics observes real people making real decisions in a laboratory or a field setting. By manipulating variables such as incentives, information, or social norms, experimental economists can isolate the effects of different factors on consumer behavior.
Experimental economics can help firms understand consumer behavior in several ways. First, it can provide empirical evidence for or against existing theories and models of consumer preferences, beliefs, and decision-making. For example, experimental economics can test whether consumers are rational, risk-averse, or influenced by cognitive biases. Second, it can help firms design and evaluate new products, services, or policies that aim to improve consumer welfare or satisfaction. For example, experimental economics can help firms test the impact of different pricing schemes, loyalty programs, or nudges on consumer demand or loyalty. Third, it can help firms explore and discover new insights and opportunities that may not be obvious from conventional data sources or methods. For example, experimental economics can help firms identify consumer segments, preferences, or behaviors that are hidden or heterogeneous.
Running experiments are a great way to test theories but also to develop new ones. You can ask participants for feedback and involve them in your project.
To conduct experimental economics, firms need to follow some basic steps. First, they need to define the research question and the hypothesis they want to test. Second, they need to design the experiment and choose the appropriate setting, participants, and variables. Third, they need to implement the experiment and collect the data. Fourth, they need to analyze the data and interpret the results. Fifth, they need to report and communicate the findings and implications.
In my experience having a clear research protocol, shared with experts for feedback, and texted on small groups, is critical.
Experimental economics comes with several challenges, most notably the cost and time involved, as well as the potential ethical issues that arise. Furthermore, firms need to consider the validity and generalizability of the results, controlling for potential confounding factors, such as selection bias or demand effects. Additionally, they must assess whether the results can be replicated or applied to different contexts, populations, or scenarios. All of these challenges must be taken into account when conducting experiments and ensuring compliance with relevant regulations and standards of conduct.
If in doubt ask for help. There is nothing worse than conducting some interesting research but being unable to rely on if due to inadequate procedures.
Experimental economics has been applied to multiple domains and industries, such as retail, finance, health, education, or energy. For instance, in the retail sector it can help firms understand how customers respond to different discounts, coupons, or promotions and how they impact sales or customer retention. In the finance industry it can be used to analyze how people make financial decisions and how they are affected by factors like interest rates or fees. It can also be applied to the health sector to understand how people make health-related decisions and what influences them such as prices or quality. In the education sector it can be used to investigate how people make education-related decisions and what motivates them like scholarships or peer effects. Lastly, in the energy sector it can be used to examine how consumers use and conserve energy and how they react to policies or interventions like tariffs or smart meters.
I have used experiments to test how behaviour changes in different contexts. In an education setting I can see whether perspectives change based on framing effects or expected answers. This helps to ensure conversations are open and honest.
I think experiments are best run as team work. So finding a group to collaborate with is a key success criteria. I encourage people to reach out for outside industry support and advice.