We study the structure of markets when traders are given the opportunity to create their own market, as on the internet. On the internet, public exchanges have in many cases been replaced by private exchanges. We use experiments to investigate possible reasons for the failure of public exchanges. In our experimental markets, when traders make an offer, they decide whom to inform about the offer. Participants typically inform all traders on the other side of the market, but not on their own side, resulting in a private, not a public exchange. This private exchange leads to the same outcomes in terms of prices and efficiency as a double auction. When we impose transaction costs on the buyers, only the sellers make private offers, which results in an inefficient market. When we provide incentives for sellers to inform each other, most of the sellers reveal a strict preference to hide offers from rivals. However, when sellers do share price information, they attain a higher price and benefit collectively.
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
101.
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