Figure 9: Effects of strategic power on rent-sharing and efficiency in China compared to Germany The first two columns of Figure 9 present the efficiency and rent-sharing consequences of strategic power in the Chinese sessions, whereas the last two columns re-show the respective results from the German sessions (Figure 2). It becomes obvious that the efficiency effect of changing strategic power no longer exists in the Chinese sessions. The average quality is 7.04 if sellers have strategic power and 7.10 if buyers are strategically favoured, which translates into a trading efficiency of about 70% in both cases61. Significance tests do not detect a different quality level when strategic power is switched from one side to the other62. Thus, our hypothesis H2.2, that switching strategic power from seller to buyer leads to a higher efficiency level, has to be rejected for the Chinese data. In the spS-treatments, quality levels are significantly higher in China than in Germany (5.52 on average)63, while quality-levels in the spB-treatments are almost identical in both countries (on average, 6.85 in Germany)64. In order to understand why quality-levels are higher in the Chinese spS-treatments than in the German spB-treatments and efficiency thereby unaffected by strategic power in the Chinese sessions (in contract to Germany), let us look at the incentives of sellers to provide above-
61 Recall that trading efficiency is defined as achieved gains from trade relative to maximum gains from trade.
Trading efficiency is about 2.7% (1/37) at minimum quality (q=1) and 100% at maximum quality (q=10).
62 Mann-Whitney U test, two-sided: p=0.831.
63 Mann-Whitney U test, two-sided: p=0.001.
64 Mann-Whitney U test, two-sided: p=0.399.
0%
minimum quality. As we discussed in section 3.2.2, sellers’ incentives to provide quality change with strategic power. In a market where buyers have strategic power, sellers are motivated to provide a high quality if they expect a reciprocal behaviour from buyers. By contrast, in markets where sellers have strategic power, quality choices reflect sellers’
reciprocity to buyers’ price offers. If buyers deliver a high price offer, it can trigger high quality choices by sellers. Reciprocal sellers would reciprocate both within and outside relations, whereas money-maximising sellers would only reciprocate if they can thereby enter or stay within a rent-generating relation.
The reciprocal behaviour by sellers is also shown by the data: sellers’ quality choices are strongly correlated with buyers’ prices. Within-group Spearman’s rank correlation coefficients vary from 0.492 to 0.888 in spS-treatments; the binomial test rejects the null hypothesis of an equal probability of positive and negative correlation coefficients65. This finding allows us to find a first explanation why efficiency is higher in the Chinese spS-treatments than in the German spS-spS-treatments66. When sellers have strategic power, Chinese buyers choose significantly higher prices than German buyers67. As Chinese sellers display, on average, a level of reciprocity at least as high as German sellers68, higher prices in Chinese spS-treatments imply a higher quality level. Why do Chinese buyers pay higher prices? We connect this question with our original idea about relational contracting. As expected, we find that the degree of relational contracting is significantly higher in China than in Germany when sellers have strategic power (47.37% in China versus 31.73% in Germany)69. Re-examining price-differences between German and Chinese data reveals that Chinese buyers in spS-treatments do not pay significantly higher prices within relations (53.22 in China versus 51.39 in Germany) but tend to pay more outside relations (41.05 in China versus 36.1 in Germany)70; as prices are higher within relations than outside relations71, higher average prices in Chinese spS-treatments compared to German spS-treatments are therefore partly driven by a higher level of relational contracting but also to somewhat higher prices outside relations. Outside relations, the somewhat higher prices bring back a significantly higher quality level in China
65 Binomial test, two-sided: p<0.001.
66 Mann-Whitney U test, two-sided: p=0.002.
67 Mann-Whitney U test, two-sided: p=0.060.
68 Both the correlations between prices and quality (Mann-Whitney U test, two-sided: p=0.525) and the level of reciprocity, as measured by q/p, (Mann-Whitney U test, two-sided: p=0.319) are indistinguishable between the Chinese and the German spS-treatments, with average level of reciprocity (q/p) being slightly higher in the Chinese than in the German spS-treatments (0.155 in China versus 0.151 in Germany).
69 Mann-Whitney U test, two-sided: p=0.007.
70 Mann-Whitney U test, two-sided: p=0.713 (within relations); p=0.178 (outside relations).
71 Wilcoxon signed ranks test, two-sided: p<0.001.
than in Germany (5.59 in China versus 4.20 in Germany)72. By contrast, quality-levels within relations are indistinguishable between the Chinese and the German spS-treatments (8.65 in China versus 8.29 in Germany) and, in China as in Germany, higher than outside relations73. Therefore, quality is higher in the Chinese spS-treatments partly as a direct consequence of a higher level of relational contracting; it is furthermore a result of a higher quality level outside relations.
While the data do not allow finding a comprehensive explanation for somewhat higher prices and higher quality outside relations in Chinese treatments compared to German spS-treatments, relational contracting may well play a role. Based on our cross-cultural hypotheses, we expect our Chinese subjects to rely more on relational contracting than our German subjects. This may not only show in the degree of relational contracting but also in attempts to create relationships. Higher prices by buyers and higher quality choices by sellers may be seen as stronger attempts to form a relation. Alternatively, our Chinese subjects may be more cooperative, for reasons unrelated to the dynamic incentives from relational contracting, which should also be conducive to the establishment of relations (we will come to this question in more depth in section 8.2).
Interestingly, switching strategic power from sellers to buyers seizes to affect efficiency in China; nor are, in fact, quality levels in the Chinese spB-treatments higher than in the German spB-treatments. At first sight, this seems puzzling; the level of relational contracting is still higher in the Chinese sessions than in German sessions when buyers have strategic power (25.40% in China and 14.34% in Germany) – albeit less so than in the spS-treatments and only at a weakly significant level74. Hence, on a group-level, the stronger dynamic incentives arising for sellers to perform from a higher level of relational contracting may not simply be added to stronger static incentives when buyers have strategic power. This is also visible in that we find no positive correlation between the share of relations and the quality level in the Chinese spB-treatments. Looking at individual trades, we nevertheless find, as in Germany, trades within relations to be characterised by higher efficiency (9.03 inside relations versus 6.34 outside relations75). On a mechanical level, we can therefore say that the level of relational contracting is not sufficiently higher in the Chinese spB-treatments compared to the German spB-treatments to increase efficiency above the level of the corresponding German
72 Mann-Whitney U test, two-sided: p=0.024.
73 Wilcoxon signed ranks test, two-sided: p<0.001.
74 Mann-Whitney U test, two-sided: p=0.091.
75 Wilcoxon signed ranks test, two-sided: p<0.001.
treatments. Behaviourally, however, we still need an explanation why the dynamic and static incentives do not seem to add up; in fact, they seem to have a substitutive relation: on a group-level, the share of trades within relations is significantly and strongly negatively correlated with quality-levels outside relations76. Hence, it seems the higher the quality that sellers provided outside relations, the less did buyers rely on relations in order to enforce contracts.
To conclude, the effect of strategic power on efficiency found in our German data as well as by WR (2007) is not robust. If subjects tend to rely more on relational contracting, as in China compared to Germany, efficiency is raised when sellers have strategic power but not when buyers have strategic power. The reason seems to be Chinese buyers relying less on relational contracting if their profit prospects outside relations are good. The potential efficiency benefits from more relational contracting (in China compared to Germany) is thereby lost when static incentives for sellers to perform are already strong.
Result C-SP1: Efficiency is not affected by strategic power in China. Compared to the German treatments, efficiency is higher in Chinese spS-treatments but not higher in German spB-treatments.
From Figure 9, we can see that also in China the strategically favoured side gets a larger share of rents, both compared to their trading-partners and to an environment in which they are the strategically unfavoured side. In the spB-treatments, buyers earn a significantly higher share of rents than sellers77 and than buyers in the spS-treatments78. The same holds when sellers have strategic power. Sellers gain a significantly higher share of rents than buyers79 and compared to their counterparts in the spB-treatments80. The finding in Germany that strategic power pays off for strategically favoured side is therefore robust to the degree of relational contracting.
Result C-SP2: Strategic power pays off for the strategically favoured side also under more relational contracting.
76 Spearman’s rho: -0.706, p=0.01 (two-sided).
77 Wilcoxon signed ranks test, two-sided: p<0.001.
78 Mann-Whitney U test, two-sided: p<0.001.
79 Wilcoxon signed ranks test, two-sided: p<0.002.
80 Mann-Whitney U test, two-sided: p<0.001.