The Competitive Market Paradox
AbstractThe competitive market model is a paradoxical. In perfect competition, agents cannot influence price: they only select an output quantity. Such passive behavior doesn’t conform to the intuitive notion of competition. This paper describes an experiment which demonstrates that near or even at a competitive equilibrium price, competition is undiminished. A substantial difference between the performance of sellers and buyers frequently results from this vigorous competition, even with low price variability and approximate efficiency. In double auction experiment sessions conducted with both automated and human agents, exogenous variation of the pace of asks and bids of automated agents demonstrates that the performance difference between sellers and buyers results primarily from a difference between the pace of asks and bids. If the buyers’ pace is slower than sellers’ pace, buyers make price concessions less frequently than sellers so that prices move below the equilibrium price. Then more buyers become active and fewer sellers remain active. Prices stabilize when changes to the numbers of active buyers and sellers offset the superior bargaining capability of one side or the other. In competitive equilibrium, to a first approximation agents are price takers, but that doesn’t preclude vigorous competition: competitive behavior moves to the dimension of bargaining pace.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1180.
Length: 30 pages
Date of creation: Feb 2006
Date of revision:
Bargaining ; bounded rationality ; competitive equilibrium ; double auction ; experimental economics;
Other versions of this item:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-20 (All new papers)
- NEP-COM-2006-05-20 (Industrial Competition)
- NEP-EXP-2006-05-20 (Experimental Economics)
- NEP-IND-2006-05-20 (Industrial Organization)
- NEP-MIC-2006-05-20 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ariel Rubinstein, 2010.
"Perfect Equilibrium in a Bargaining Model,"
Levine's Working Paper Archive
252, David K. Levine.
- Daniel Friedman, 1982.
"Price Formation in Double Auction Markets,"
UCLA Economics Working Papers
278, UCLA Department of Economics.
- Williams, Arlington W & Smith, Vernon L, 1984. "Cyclical Double-Auction Markets with and without Speculators," The Journal of Business, University of Chicago Press, vol. 57(1), pages 1-33, January.
- Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
- Steven Gjerstad & John Dickhaut, 2003.
"Price Formation in Double Auctions,"
- Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
- Easley, David & Ledyard, John., . "Theories of Price Formation and Exchange in Double Oral Auctions," Working Papers 611, California Institute of Technology, Division of the Humanities and Social Sciences.
- Smith, Vernon L. & Williams, Arlington W., 1982. "The effects of rent asymmetries in experimental auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 99-116, March.
- Steven Gjerstad & Jason M. Shachat, 2007. "Individual Rationality and Market Efficiency," Purdue University Economics Working Papers 1204, Purdue University, Department of Economics.
- Steven Gjerstad, 2007.
"Price Dynamics in an Exchange Economy,"
Purdue University Economics Working Papers
1205, Purdue University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Krannert PHD).
If references are entirely missing, you can add them using this form.