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Instability of Equilibria in Experimental Markets: Upward-Sloping Demands, Externalities, and Fad-Like Incentives

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  • Charles R. Plott
  • Jared Smith

Abstract

The objective of the paper is to study markets in which the value of the activity to any one person increases with the level with which the activity is undertaken by others. The general interpretation could be fads, mimicking behavior, or some sort of belief formation process in which the beliefs or expectations of agents about some underlying state of nature are influenced by the buying behavior of other agents. The result is to create a market that can be modeled as having an upward-sloping market demand curve. The questions posed are (i) in the fad-like environment, does the classical concept of equilibrium (as an equating of market demand and market supply) accurately predict market behavior; (ii) can both stable and unstable equilibria be observed; and (iii) which of the two classical concepts of stability best describes the conditions under which instability is observed? Under the conditions of a fad-like demand side externality in a market organized by the multiple unit double auction (MUDA), market equilibration occurs at a point where demand equals supply. The disequilibrium behavior follows the dynamics of the Marshallian model of dynamics, as opposed to the Walrasian model. These results confirm and extend the major findings of Plott and George who studied a similar environment with a downward-sloping supply.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 65 (1999)
Issue (Month): 3 (January)
Pages: 405-426

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Handle: RePEc:sej:ancoec:v:65:3:y:1999:p:405-426

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Sean Crockett & Ryan Oprea & Charles Plott, 2011. "Extreme Walrasian Dynamics: The Gale Example in the Lab," American Economic Review, American Economic Association, American Economic Association, vol. 101(7), pages 3196-3220, December.
  2. Anderson, Christopher M. & Plott, Charles R. & Shimomura, K.-I.Ken-Ichi & Granat, Sander, 2004. "Global instability in experimental general equilibrium: the Scarf example," Journal of Economic Theory, Elsevier, Elsevier, vol. 115(2), pages 209-249, April.
  3. Noussair, Charles & Plott, Charles & Riezman, Raymond, 2003. "Production, trade, prices, exchange rates and equilibration in large experimental economies," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 1188, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, Springer, vol. 6(2), pages 81-90, July.
  5. Finn Christensen, 2014. "Demand with Consumption Externalities," Working Papers, Towson University, Department of Economics 2014-02, Towson University, Department of Economics, revised Apr 2014.
  6. K.Vela Velupillai, 2012. "The Epistemology of Simulation, Computation and Dynamics in Economics," ASSRU Discussion Papers, ASSRU - Algorithmic Social Science Research Unit 1218, ASSRU - Algorithmic Social Science Research Unit.
  7. Ortmann, Andreas, 2003. "Charles R. Plott's collected papers on the experimental foundations of economic and political science," Journal of Economic Psychology, Elsevier, Elsevier, vol. 24(4), pages 555-575, August.
  8. Micha Gisser & James E. McClure & Giray Okten & Gary Santoni, 2009. "Some Anomalies Arising from Bandwagons that Impart Upward Sloping Segments to Market Demand," Econ Journal Watch, Econ Journal Watch, vol. 6(1), pages 21-34, January.

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