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An Experiment on Partnership Protocols for Bilateral Trade with Incomplete Information

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  • Barry Sopher

    () (Rutgers University)

  • Revan Sopher

    () (Rutgers University)

Abstract

We study experimentally “partnership protocols” of the sort proposed by Kalai and Kalai (2010), for bilateral trade games with incomplete information. We utilize the familiar game analyzed by Chatterjee and Samuelson (1983) and Myerson and Sattherwaite (1983), with a buyer and seller with value and cost independently distributed uniformly on (0,100). The usual rules of the game are for the buyer and seller to submit price bids and asks, and for trade to occur if and only if the buyer’s bid price exceeds the seller’s ask price, in which case trade occurs at the average of the bid and the ask price. We compare the efficiency of trade and the nature of bid functions in this standard game to those in other versions of the game, including games in which cheap talk is allowed prior to trade (either before or after the traders know their own information, but without knowing each others’ information), games with the formal mechanisms proposed by Kalai and Kalai available as an option for the traders to use, and games with both the mechanisms and cheap talk available. We consider both ex ante and interim mechanisms. That is, traders simultaneously choose whether to opt in to the mechanism either prior to knowing their own information, or after knowing their own information. In the last two versions of the game, cheap talk takes place prior to the opt-in decision. We find that the formal mechanisms significantly increase the efficiency of trade in both the ex ante and interim cases. Specifically, in the baseline game, traders captured 73% of the available surplus (compared to a theoretical maximum of 84% possible with optimal strategies). Efficiency rises to 87% and 82% for the ex ante and interim mechanisms, respectively, and further rises to 90% and 84% when cheap talk is also allowed with the mechanisms. When only cheap talk is allowed, traders capture 81% (for ex ante talk), but only 70% (for interim talk). On average, 55% of trading pairs opt in to mechanisms when they are available.

Suggested Citation

  • Barry Sopher & Revan Sopher, 2013. "An Experiment on Partnership Protocols for Bilateral Trade with Incomplete Information," Departmental Working Papers 201304, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:201304
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    References listed on IDEAS

    as
    1. Schotter, Andrew & Sopher, Barry, 2007. "Advice and behavior in intergenerational ultimatum games: An experimental approach," Games and Economic Behavior, Elsevier, vol. 58(2), pages 365-393, February.
    2. Hurwicz,Leonid & Reiter,Stanley, 2008. "Designing Economic Mechanisms," Cambridge Books, Cambridge University Press, number 9780521724104, March.
    3. Ananish Chaudhuri & Andrew Schotter & Barry Sopher, 2009. "Talking Ourselves to Efficiency: Coordination in Inter-Generational Minimum Effort Games with Private, Almost Common and Common Knowledge of Advice," Economic Journal, Royal Economic Society, vol. 119(534), pages 91-122, January.
    4. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    5. Andrew Schotter & Barry Sopher, 2003. "Social Learning and Coordination Conventions in Intergenerational Games: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 498-529, June.
    6. 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.
    7. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap talk can matter in bargaining," Journal of Economic Theory, Elsevier, vol. 48(1), pages 221-237, June.
    8. repec:mes:challe:v:34:y:1991:i:1:p:53-57 is not listed on IDEAS
    9. Williams,Steven R., 2008. "Communication in Mechanism Design," Cambridge Books, Cambridge University Press, number 9780521851312, March.
    10. Radner, Roy & Schotter, Andrew, 1989. "The sealed-bid mechanism: An experimental study," Journal of Economic Theory, Elsevier, vol. 48(1), pages 179-220, June.
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    More about this item

    Keywords

    Experiments; Bilateral Trade; Protocols;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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