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Do Traders Learn to Select Efficient Market Institutions?

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  • Carlos Alós-Ferrer
  • Johannes Buckenmaier
  • Georg Kirchsteiger

Abstract

When alternative market institutions are available, traders have to decide both where and how much to trade. We conducted an experiment where traders could decide to trade either in an (efficient) double-auction institution or in a posted- offers one, which should favor sellers. When sellers face decreasing returns to scale (increasing production costs), fast coordination on the double-auction occurs, with the posted-offers institution becoming inactive. In contrast, under constant returns to scale, both institutions remain active and coordination is slower. The reason is that, in a finite-horizon setting, sellers trade off larger efficiency in a market with dwindling profits for biased-up profits in a market with vanishing customers. Hence, our results indicate that efficiency alone might not be sufficient to guarantee coor- dination on a single market institution if the distribution of the gains from trade is asymmetric. Trading behavior approaches equilibrium predictions (market clearing) within each institution, but switching behavior across institutions is explained by simple rules of thumb, with buyers chasing low prices and sellers considering both prices and trader ratios.

Suggested Citation

  • Carlos Alós-Ferrer & Johannes Buckenmaier & Georg Kirchsteiger, 2020. "Do Traders Learn to Select Efficient Market Institutions?," ECON - Working Papers 364, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:364
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    More about this item

    Keywords

    Market selection; market clearing; posted offer market; constant returns to scale; experiment;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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