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Durability, Re-trading and Market Performance

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  • John Dickhaut

    (Economic Science Institute, CHapman University)

  • Shengle Lin

    ()
    (Economic Science Institute, CHapman University)

  • David Porter

    ()
    (Economic Science Institute, CHapman University)

  • Vernon L. Smith

    (Economic Science Institute, Chapman University)

Abstract

Key differential structural characteristics of environments studied in previous market experiments have documented large divergences in their observed performance, particularly discrepancies in their convergence to expected equilibrium outcomes. We investigate why this should be so. The type of competitive equilibrium where a market clears at a particular price as initiated by Arrow and Debreu (1954) has long been studied in the laboratory. We refer to these experiments as Supply and Demand (SD) experiments. SD experiments are highly reduced in form: items are not re-tradable, buyers and sellers are specialized in these roles, and no second commodity, cash, is used as a medium of exchange, although cash enters as a numeraire qua reward incentive for subjects. Markets with these features that are repeated over time converge rapidly to the predicted equilibrium under a regime of strict private dispersed information on individual values that define the equilibrium predictions. In contrast, consider asset markets, in which shares can be freely re-traded against cash within and across periods, shares have well-defined common values based on common public information on expected cash “dividend” yields, and individuals are not specialized as buyers or sellers. These markets produce price bubbles that converge only with experience across repeat sessions. The prospect of re-trade, and perhaps the lack of buyer/seller specialization, results in market behavior that contrasts sharply with the perishable goods that characterize the SD experiments. Building on this background analysis we report new experiments that combine features of both environments and initiate an investigation of how commodity durability that constrains re-trading characteristics affect the observed variation in market performance.

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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 10-01.

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Length: 28 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:chu:wpaper:10-01

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  1. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 831-59, July.
  2. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 111.
  4. Plott, Charles R. & Sunder, Shyam., . "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational Expectations Models," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 331, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Ketcham, Jon & Smith, Vernon L & Williams, Arlington W, 1984. "A Comparison of Posted-Offer and Double-Auction Pricing Institutions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(4), pages 595-614, October.
  6. David Porter & Vernon Smith, 1994. "Stock market bubbles in the laboratory," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 1(2), pages 111-128.
  7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  8. Reshmaan N. Hussam & David Porter & Vernon L. Smith, 2008. "Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?," American Economic Review, American Economic Association, American Economic Association, vol. 98(3), pages 924-37, June.
  9. Hanson, Robin & Oprea, Ryan & Porter, David, 2006. "Information aggregation and manipulation in an experimental market," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 60(4), pages 449-459, August.
  10. Bosch-Domènech, Antoni & Vriend, Nicolaas J., 2008. "The Classical Experiments on Cournot Oligopoly," Handbook of Experimental Economics Results, Elsevier, Elsevier.
  11. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1119-51, September.
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