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Rational Frenzies and Crashes

  • Jeremy Bulow
  • Paul Klemperer

Most markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide between buying now or later, rather than only now or never, buyers' current 'willingness to pay' is much more sensitive to price than is the demand curve. A consequence is that markets will be extremely sensitive to new information, leading to both 'frenzies, " where demand feeds upon itself, and "crashes," where price drops discontinuously. Although no buyer's independent reservation value reveals much about overall demand, a small increase in one such value can cause a large increase or decrease in average price.

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File URL: http://www.nber.org/papers/t0112.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0112.

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Date of creation: Sep 1991
Publication status: published as Journal of Political Economy, vol. 102, no. 1, pp. 1-23, (February 1993)
Handle: RePEc:nbr:nberte:0112
Note: ME
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