IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v167y2017icp53-74.html
   My bibliography  Save this article

Information and coordination frictions in experimental posted offer markets

Author

Listed:
  • Helland, Leif
  • Moen, Espen R.
  • Preugschat, Edgar

Abstract

We experimentally investigate buyer and seller behavior in small markets with two kinds of frictions. First, a subset of buyers may have (severely) limited information about prices, and choose a seller at random. Second, sellers may not be able to serve all potential customers. Such capacity constraints can lead to coordination frictions where some sellers and buyers may not be able to trade. Theory predicts very different equilibrium outcomes when we vary the set-up along these two dimensions. In particular, it implies that a higher number of informed buyers will lead to lower prices when sellers do not face capacity constraints, while prices may actually increase if sellers are capacity constrained, as shown by Lester (2011). In the experiment, the differences between the constrained and non-constrained case are confirmed; prices fall when sellers are not capacity constrained but either do not fall by much or even increase when they are not. We find that prices are quite close to the predicted equilibrium values except in treatments where unconstrained sellers face a large fraction of informed buyers. However, introducing noise into the theoretical decision making process produces a pattern of deviations that fits well with the observed ones.

Suggested Citation

  • Helland, Leif & Moen, Espen R. & Preugschat, Edgar, 2017. "Information and coordination frictions in experimental posted offer markets," Journal of Economic Theory, Elsevier, vol. 167(C), pages 53-74.
  • Handle: RePEc:eee:jetheo:v:167:y:2017:i:c:p:53-74
    DOI: 10.1016/j.jet.2016.09.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053116300813
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Morgan, John & Orzen, Henrik & Sefton, Martin, 2006. "An experimental study of price dispersion," Games and Economic Behavior, Elsevier, vol. 54(1), pages 134-158, January.
    2. Henrik Orzen, 2008. "Counterintuitive number effects in experimental oligopolies," Experimental Economics, Springer;Economic Science Association, vol. 11(4), pages 390-401, December.
    3. Friedman, Daniel & Huck, Steffen & Oprea, Ryan & Weidenholzer, Simon, 2015. "From imitation to collusion: Long-run learning in a low-information environment," Journal of Economic Theory, Elsevier, vol. 155(C), pages 185-205.
    4. Jacob K. Goeree & Charles A. Holt, 2001. "Ten Little Treasures of Game Theory and Ten Intuitive Contradictions," American Economic Review, American Economic Association, vol. 91(5), pages 1402-1422, December.
    5. Nejat Anbarci & Nick Feltovich, 2013. "Directed Search, Coordination Failure, And Seller Profits: An Experimental Comparison Of Posted Pricing With Single And Multiple Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 873-884, August.
    6. Jan Potters & Sigrid Suetens, 2009. "Cooperation in Experimental Games of Strategic Complements and Substitutes," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 1125-1147.
    7. Philipp Otto & Friedel Bolle, 2011. "Matching markets with price bargaining," Experimental Economics, Springer;Economic Science Association, vol. 14(3), pages 322-348, September.
    8. Cason, Timothy N. & Friedman, Daniel, 2003. "Buyer search and price dispersion: a laboratory study," Journal of Economic Theory, Elsevier, vol. 112(2), pages 232-260, October.
    9. Philip A. Haile & Ali Hortaçsu & Grigory Kosenok, 2008. "On the Empirical Content of Quantal Response Equilibrium," American Economic Review, American Economic Association, vol. 98(1), pages 180-200, March.
    10. Martin Dufwenberg & Uri Gneezy & Jacob Goeree & Rosemarie Nagel, 2007. "Price floors and competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 211-224, October.
    11. Jack Ochs, 1990. "The Coordination Problem in Decentralized Markets: An Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 545-559.
    12. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    13. Cary A. Deck & Bart J. Wilson, 2006. "Tracking Customer Search to Price Discriminate," Economic Inquiry, Western Economic Association International, vol. 44(2), pages 280-295, April.
    14. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    15. Nejat Anbarci & Nick Feltovich, 2014. "Pricing in competitive search markets: Experimental evidence of the roles of price information and fairness perceptions," Monash Economics Working Papers 55-14, Monash University, Department of Economics.
    16. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
    17. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
    18. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
    19. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
    20. Timothy N. Cason & Charles Noussair, 2007. "A Market With Frictions In The Matching Process: An Experimental Study," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 665-691, May.
    21. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 3.
    22. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 448-466, Autumn.
    23. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 7.
    24. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    25. Cason, Timothy N. & Datta, Shakun, 2006. "An experimental study of price dispersion in an optimal search model with advertising," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 639-665, May.
    26. Radner, Roy, 1980. "Collusive behavior in noncooperative epsilon-equilibria of oligopolies with long but finite lives," Journal of Economic Theory, Elsevier, vol. 22(2), pages 136-154, April.
    27. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    28. Jacob Goeree & Charles Holt & Thomas Palfrey, 2005. "Regular Quantal Response Equilibrium," Experimental Economics, Springer;Economic Science Association, vol. 8(4), pages 347-367, December.
    29. Melvyn G. Coles & Jan Eeckhout, 2000. "Heterogeneity as a coordination device," Economics Working Papers 510, Department of Economics and Business, Universitat Pompeu Fabra.
    30. Martin Sefton & Abdullah Yavas & Eric Abrams, 2000. "An experimental comparison of two search models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 735-749.
    31. Jon Ketcham & Vernon L. Smith & Arlington W. Williams, 1984. "A Comparison of Posted-Offer and Double-Auction Pricing Institutions," Review of Economic Studies, Oxford University Press, vol. 51(4), pages 595-614.
    32. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 4.
    33. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 2.
    34. James D. Montgomery, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 163-179.
    35. McKelvey, Richard D. & Palfrey, Thomas R., 2008. "Quantal Response Equilibria: A Brief Synopsis," Handbook of Experimental Economics Results, Elsevier.
    36. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 8.
    37. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 5.
    38. Benjamin Lester, 2011. "Information and Prices with Capacity Constraints," American Economic Review, American Economic Association, vol. 101(4), pages 1591-1600, June.
    39. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    40. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 1.
    41. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-686, May.
    42. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    43. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 6.
    44. Douglas D. Davis & Charles A. Holt, 1994. "Market Power and Mergers in Laboratory Markets with Posted Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 467-487, Autumn.
    45. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:167:y:2017:i:c:p:53-74. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.