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Cheating in markets: A laboratory experiment

  • Cassar, Alessandra
  • Friedman, Daniel
  • Schneider, Patricia Higino

We develop a two-market model under three conditions: autarky, frictionless free trade, and free trade with cheating. With cheating, buyers can underpay by [pi]% in cross-market trades and sellers can deliver [pi]% of full value. We solve for competitive equilibrium with cheating and obtain novel testable predictions on price, volume and surplus. We test these in a laboratory experiment using parameters intended to challenge the theory. The results are generally consistent with competitive equilibrium. We find evidence of price unification, market segmentation, a cross-market volume of trade lower under cheating than in frictionless free trade, but a higher overall volume.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 72 (2009)
Issue (Month): 1 (October)
Pages: 240-259

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Handle: RePEc:eee:jeborg:v:72:y:2009:i:1:p:240-259
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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