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The Effects of Prediction Market Design and Price Elasticity on Trading Performance of Users: An Experimental Analysis

Author

Listed:
  • Ivo Blohm
  • Christoph Riedl
  • Johann Fuller
  • Orhan Koroglu
  • Jan Marco Leimeister
  • Helmut Krcmar

Abstract

We employ a 2x3 factorial experiment to study two central factors in the design of prediction markets (PMs) for idea evaluation: the overall design of the PM, and the elasticity of market prices set by a market maker. The results show that 'multi-market designs' on which each contract is traded on a separate PM lead to significantly higher trading performance than 'single-markets' that handle all contracts one on PM. Price elasticity has no direct effect on trading performance, but a significant interaction effect with market design implies that the performance difference between the market designs is highest in settings of moderate price elasticity. We contribute to the emerging research stream of PM design through an unprecedented experiment which compares current market designs.

Suggested Citation

  • Ivo Blohm & Christoph Riedl & Johann Fuller & Orhan Koroglu & Jan Marco Leimeister & Helmut Krcmar, 2012. "The Effects of Prediction Market Design and Price Elasticity on Trading Performance of Users: An Experimental Analysis," Papers 1204.3457, arXiv.org.
  • Handle: RePEc:arx:papers:1204.3457
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    File URL: http://arxiv.org/pdf/1204.3457
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    References listed on IDEAS

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    1. Gerrit Kamp & Peter Koen, 2009. "Improving the Idea Screening Process within Organizations using Prediction Markets: A Theoretical Perspective," Journal of Prediction Markets, University of Buckingham Press, vol. 3(2), pages 39-64, August.
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    10. Stefan Luckner & Christof Weinhardt, 2007. "How to Pay Traders in Information Markets: Results from a Field Experiment," Journal of Prediction Markets, University of Buckingham Press, vol. 1(2), pages 147-156, July.
    11. Christian Slamka & Wolfgang Jank & Bernd Skiera, 2012. "Secondā€Generation Prediction Markets for Information Aggregation: A Comparison of Payoff Mechanisms," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 31(6), pages 469-489, September.
    12. Henry Berg & Todd A. Proebsting, 2009. "Hanson's Automated Market Maker," Journal of Prediction Markets, University of Buckingham Press, vol. 3(1), pages 45-59, April.
    13. Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2010. "Idea Generation and the Quality of the Best Idea," Management Science, INFORMS, vol. 56(4), pages 591-605, April.
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    Cited by:

    1. Cary Deck & David Porter, 2013. "Prediction Markets In The Laboratory," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 589-603, July.

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