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Double Auction Dynamics: Structural Effects of Non-binding Price Controls

  • Dhananjay K.
  • Shyam Sunder

In competitive equilibrium, non-binding price controls (that is, price floors below and ceilings above the equilibrium) should not affect market outcomes, but in laboratory experiments they do. We build a simple dynamic model of double auction markets with zero-intelligence (ZI) computer traders that accounts for many, though not all, of the discrepancies between the data and the Walrasian tatonnement predictions. The success of the model in organizing the data, and in isolating various consequences of price controls, shows that the simple ZI model is a powerful tool to gain insights into the dynamics of market institutions.

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File URL: http://icfpub.som.yale.edu/publications/2539
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm141.

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Date of creation: 01 Oct 2004
Date of revision: 01 Apr 2008
Handle: RePEc:ysm:somwrk:ysm141
Contact details of provider: Web page: http://icf.som.yale.edu/

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  1. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  2. Isaac, R. Mark & Plott, Charles R., . "Price Controls and the Behavior of Auction Markets: An Experimental Examination," Working Papers 253, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Luo Guo Ying, 1995. "Evolution and Market Competition," Journal of Economic Theory, Elsevier, vol. 67(1), pages 223-250, October.
  4. Jamal, Karim & Sunder, Shyam, 1996. "Bayesian equilibrium in double auctions populated by biased heuristic traders," Journal of Economic Behavior & Organization, Elsevier, vol. 31(2), pages 273-291, November.
  5. Ramon Marimon & Stephen E. Spear & Shyam Sunder, 1993. "Expectationally-driven market volatility: An experimental study," Economics Working Papers 21, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Shyam Sunder & MODELS A, 2002. "Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders," Yale School of Management Working Papers ysm284, Yale School of Management, revised 01 Sep 2004.
  7. Herbert A. Simon, 1996. "The Sciences of the Artificial, 3rd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691914, June.
  8. Timothy N. Cason & Daniel Friedman, 1997. "Price Formation in Single Call Markets," Econometrica, Econometric Society, vol. 65(2), pages 311-346, March.
  9. Shinichi Hirota & Shyam Sunder, 2002. "Stock Market as a 'Beauty Contest': Investor Beliefs and Price Bubbles sans Dividend Anchors," Yale School of Management Working Papers ysm2, Yale School of Management.
  10. Sunder, S., 1992. "Lower Bounds for Efficiency of Surplus Extraction in Double Auctions," GSIA Working Papers 1992-17, Carnegie Mellon University, Tepper School of Business.
  11. Coursey, Don L & Smith, Vernon L, 1983. "Price Controls in a Posted Offer Market," American Economic Review, American Economic Association, vol. 73(1), pages 218-21, March.
  12. Cason, Timothy N. & Friedman, Daniel, 1996. "Price formation in double auction markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1307-1337, August.
  13. Hardle, Wolfgang & Kirman, Alan, 1995. "Nonclassical demand : A model-free examination of price-quantity relations in the Marseille fish market," Journal of Econometrics, Elsevier, vol. 67(1), pages 227-257, May.
  14. Smith, Vernon L & Williams, Arlington W, 1981. "On Nonbinding Price Controls in a Competitive Market," American Economic Review, American Economic Association, vol. 71(3), pages 467-74, June.
  15. Evans, Dorla A, 1997. "The Role of Markets in Reducing Expected Utility Violations," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 622-36, June.
  16. Gode, Dhananjay K & Sunder, Shyam, 1997. "What Makes Markets Allocationally Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 603-30, May.
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