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The Nature of Excess: Using Randomized Treatments to Investigate Price Dynamics

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  • Omar Al-Ubaydli
  • John A. List
  • Michael K. Price

Abstract

This study explores empirically the price dynamics within two distinct market institutions – a double oral auction, which resembles modern asset markets, and a bilateral exchange market, which represents markets that have existed for centuries. To provide a theoretical basis to our investigation, we test and compare the excess supply model (Walras (1874, 1877, 1889, 1896)) and the excess rent model (Smith (1962, 1965)) in both market institutions. Our approach is unique in that we make use of appropriate demand and supply systems coupled with randomization of the main treatment variable to discriminate between the theories. All previous efforts, including Smith's (1965) seminal experiments, use designs that cannot appropriately parse the models. We report several insights, perhaps most importantly, we consistently reject the Walrasian model in favor of the excess rent model, regardless of market institution. This finding has important implications both positively and normatively.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16319.

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Date of creation: Aug 2010
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Handle: RePEc:nbr:nberwo:16319

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