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Testing the Boundaries of the Double Auction

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Abstract

We report boundary experiments testing the robustness of price convergence in double auction markets for non-durable goods in which there is extreme earnings inequality at the competitive equilibrium (CE). Following up on a conjecture by Smith (1980), we test whether the well-known equilibrating power of the double auction institution is robust to the presence of complete information about traders' values and costs and the presence of symmetric market power. Contra Smith's conjecture, we find that complete information is insufficient to impede convergence to CE prices; however, introducing market power consistently causes prices to deviate from the CE, whether or not subjects possess complete information. Our design highlights the value of boundary experiments in understanding how market institutions shape behavior, and our findings help delineate the limits of the double auction institution to generate competitive outcomes.

Suggested Citation

  • Erik O. Kimbrough & Andrew Smyth, 2017. "Testing the Boundaries of the Double Auction," Discussion Papers dp17-05, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp17-05
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    File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp17-05.pdf
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    1. Davis, Douglas D. & Holt, Charles a., 1993. "Experimental economics: Methods, problems and promise," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(2), pages 179-212.
    2. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 322-322.
    3. Holt, Charles A & Langan, Loren W & Villamil, Anne P, 1986. "Market Power in Oral Double Auctions," Economic Inquiry, Western Economic Association International, vol. 24(1), pages 107-123, January.
    4. Cason, Timothy N. & Williams, Arlington W., 1990. "Competitive equilibrium convergence in a posted-offer market with extreme earnings inequities," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 331-352, December.
    5. Davis, Douglas D. & Holt, Charles A., 2008. "The Exercise of Market Power in Laboratory Experiments," Handbook of Experimental Economics Results, Elsevier.
    6. Smith, Vernon L. & Williams, Arlington W., 1982. "The effects of rent asymmetries in experimental auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 99-116, March.
    7. Williams, Arlington W, 1980. "Computerized Double-Auction Markets: Some Initial Experimental Results," The Journal of Business, University of Chicago Press, vol. 53(3), pages 235-258, July.
    8. Bart Wilson, 1998. "What Collusion? Unilateral Market Power as a Catalyst for Countercyclical Markups," Experimental Economics, Springer;Economic Science Association, vol. 1(2), pages 133-145, September.
    9. Davis, Douglas D. & Williams, Arlington W., 1990. "Market power and the institutional asymmetry of the posted offer trading institution," Economics Letters, Elsevier, vol. 34(3), pages 211-214, November.
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    More about this item

    Keywords

    double auction; market power; institutions; information; experimental economics;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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