Learning in a Laboratory Market with Random Supply and Demand
We propose a simple adaptive learning model to study behavior in the call market. The laboratory environment features buyers and sellers who receive a new random value or cost in each period, so they must learn a strategy that maps these random draws into bids or asks. We focus on buyers' adjustment of the â€œmark-downâ€ ratio of bids relative to private value and sellers' adjustment of the corresponding â€œmark-upâ€ ratio of asks relative to private cost. The learning model involves partial adjustment of these ratios towards the ex post optimum each period. The model explains a substantial proportion of the variation in traders' strategies. Parameter estimates indicate strong recency effects and negligible autonomous trend, but strongly asymmetric response to different kinds of ex post error. The asymmetry is only slightly attenuated in â€œobservational learningâ€ from other traders' ex post errors. Simulations show that the model can account for the main systematic deviations from equilibrium predictions observed in this market institution and environment. Copyright Kluwer Academic Publishers 1999
References listed on IDEAS
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.:
- Aldo Rustichini, 1992.
"Convergence to Efficiency in a Simple Market with Incomplete Information,"
995, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Rustichini, Aldo & Satterthwaite, Mark A & Williams, Steven R, 1994. "Convergence to Efficiency in a Simple Market with Incomplete Information," Econometrica, Econometric Society, vol. 62(5), pages 1041-63, September.
- McCabe, Kevin A & Rassenti, Stephen J & Smith, Vernon L, 1992. "Designing Call Auction Institutions: Is Double Dutch the Best?," Economic Journal, Royal Economic Society, vol. 102(410), pages 9-23, January.
- Gode, D.K. & Sunder, S., 1991. "Allocative Efficiency of Markets with Zero Intelligence (Z1) Traders: Market as a Partial Substitute for Individual Rationality," GSIA Working Papers 1992-16, Carnegie Mellon University, Tepper School of Business.
- Friedman, Daniel & Ostroy, Joseph, 1995. "Competitivity in Auction Markets: An Experimental and Theoretical Investigation," Economic Journal, Royal Economic Society, vol. 105(428), pages 22-53, January.
- Selten, Reinhard & Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B 270, University of Bonn, Germany.
- Smith, Vernon L & Walker, James M, 1993. "Rewards, Experience and Decision Costs in First Price Auctions," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 237-45, April.
- Timothy N. Cason & Daniel Friedman, 1997. "Price Formation in Single Call Markets," Econometrica, Econometric Society, vol. 65(2), pages 311-346, March.
- A. Roth & I. Er’ev, 2010. "Learning in Extensive Form Games: Experimental Data and Simple Dynamic Models in the Intermediate Run," Levine's Working Paper Archive 387, David K. Levine.
- Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
- Drew Fudenberg & David K. Levine, 1998.
"Learning in Games,"
Levine's Working Paper Archive
2222, David K. Levine.
- C. Monica Capra & Jacob K. Goeree & Rosario Gomez & Charles A. Holt, 2000.
"Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition,"
Virginia Economics Online Papers
336, University of Virginia, Department of Economics.
- C. Monica Capra & Jacob K Goeree & Rosario Gomez & Charles A Holt, 2002. "Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 613-636, August.
- Cheung, Yin-Wong & Friedman, Daniel, 1997. "Individual Learning in Normal Form Games: Some Laboratory Results," Games and Economic Behavior, Elsevier, vol. 19(1), pages 46-76, April.
- Satterthwaite, Mark A & Williams, Steven R, 1989. "The Rate of Convergence to Efficiency in the Buyer's Bid Double Auction as the Market Becomes Large," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 477-98, October.
- Garvin, Susan & Kagel, John H., 1994. "Learning in common value auctions: Some initial observations," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 351-372, December.
When requesting a correction, please mention this item's handle: RePEc:kap:expeco:v:2:y:1999:i:1:p:77-98. 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: (Sonal Shukla)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.