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Commodity cycles, a function of market complexity? Extending the cobweb experiment

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  • Arango, Santiago
  • Moxnes, Erling

Abstract

We examine market behavior in a series of cobweb-like experiments. As in previous studies we find no cyclicality in the simple supply lag design with five players. Step by step we add investment lags and capacity vintages, and thus external validity to the basic design. As complexity increases, prices become autocorrelated with cyclical tendencies. Regressions and simulations suggest that players put too little weight on capacity vintages when making investment decisions. Different from the original cobweb design, adaptive price expectations do not suffice to eliminate fluctuations. Thus, our experiment indicates that the basic cobweb design is not well suited to test endogenous theories of cyclicality in commodity markets.

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  • Arango, Santiago & Moxnes, Erling, 2012. "Commodity cycles, a function of market complexity? Extending the cobweb experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 321-334.
    • Handle: RePEc:eee:jeborg:v:84:y:2012:i:1:p:321-334
    DOI: 10.1016/j.jebo.2012.04.002
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    7. Delgado-Alvarez, Carlos A. & van Ackere, Ann & Larsen, Erik R & Arango-Aramburo, Santiago, 2017. "Managing capacity at a service facility: An experimental approach," European Journal of Operational Research, Elsevier, vol. 259(1), pages 216-228.
    8. Álvarez-Uribe, Karla C. & Arango-Aramburo, Santiago & Larsen, Erik R., 2018. "Forward contracts in electricity markets and capacity investment: A simulation study," Utilities Policy, Elsevier, vol. 54(C), pages 1-10.
    9. Arias-Gaviria, Jessica & Arango-Aramburo, Santiago & Lamadrid L, Alberto J., 2022. "The effects of high penetrations of renewable energy sources in cycles for electricity markets: An experimental analysis," Energy Policy, Elsevier, vol. 166(C).
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    More about this item

    Keywords

    Commodity cycles; Cournot markets; Cobweb markets; Bounded rationality; Complexity; Experimental economics;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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