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Commodity cycles, a function of market complexity? Extending the cobweb experiment

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  • Arango, Santiago
  • Moxnes, Erling

Abstract

We examine market behavior in a series of cobweb-like experiments. As in previous studies we find no cyclicality in the simple supply lag design with five players. Step by step we add investment lags and capacity vintages, and thus external validity to the basic design. As complexity increases, prices become autocorrelated with cyclical tendencies. Regressions and simulations suggest that players put too little weight on capacity vintages when making investment decisions. Different from the original cobweb design, adaptive price expectations do not suffice to eliminate fluctuations. Thus, our experiment indicates that the basic cobweb design is not well suited to test endogenous theories of cyclicality in commodity markets.

Suggested Citation

  • Arango, Santiago & Moxnes, Erling, 2012. "Commodity cycles, a function of market complexity? Extending the cobweb experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 321-334.
  • Handle: RePEc:eee:jeborg:v:84:y:2012:i:1:p:321-334
    DOI: 10.1016/j.jebo.2012.04.002
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    Cited by:

    1. Arango, Santiago & Castañeda, Jaime A. & Larsen, Erik R., 2013. "Mothballing in power markets: An experimental study," Energy Economics, Elsevier, vol. 36(C), pages 125-134.
    2. repec:bla:sysdyn:v:32:y:2016:i:3-4:p:204-232 is not listed on IDEAS
    3. Christian Erik Kampmann & John D. Sterman, 2014. "Do markets mitigate misperceptions of feedback?," System Dynamics Review, System Dynamics Society, vol. 30(3), pages 123-160, July.
    4. repec:bla:sysdyn:v:32:y:2016:i:2:p:128-153 is not listed on IDEAS
    5. Delgado-Alvarez, Carlos A. & van Ackere, Ann & Larsen, Erik R & Arango-Aramburo, Santiago, 2017. "Managing capacity at a service facility: An experimental approach," European Journal of Operational Research, Elsevier, vol. 259(1), pages 216-228.

    More about this item

    Keywords

    Commodity cycles; Cournot markets; Cobweb markets; Bounded rationality; Complexity; Experimental economics;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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