Experimental markets
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- Bu səhifədəki naviqasiya:
- Vernon Smith
- 2x2 treatment design • Old research by Smith was treatment A
- A, B, C and D
- Posted-Offer market
| LECTURE 5: EXPERIMENTAL MARKETS 5.1 Introduction 5.2 Chamberlin Market 5.3 Double auction 5.4 Robustness of double auction 5.5 Posted offer markets Comparison with double auction Response to shocks 9/11/2010 EC3322 Autumn 2010 1
Aims • Be familiar with the functioning of different experimental market institutions. • Be familiar with the key results and outcomes of experimental market institutions 9/11/2010 EC3322 Autumn 2010 2
Supply Demand
price quantity p* q*
9/11/2010 EC3322 Autumn 2010 3
Competitive markets • Assumptions – Agents are rational and selfish utility/profit maximisers – A homogeneous well defined good is produced and traded – There are numerous firms and consumers – Agents are price takers (auctioneer) • These assumptions can be seriously questioned – People are boundedly rational – People often have interdependent utility functions – There are many markets with only few firms – In most markets there is no auctioneer but agents set prices 9/11/2010 EC3322 Autumn 2010 4
Questions • Do these deviations from the assumptions constitute negligible frictions or do they seriously challenge the predictive power of the competitive market model? – Answer is very important (e.g., for the first and the second welfare theorem). • Are there real market institution for which the competitive equilibrium is a good predictor of price and quantity outcomes? • How do different market institutions differ with respect to, e.g., efficiency, convergence etc.? 9/11/2010 EC3322 Autumn 2010 5
6.2 Chamberlin s Experiment • Chamberlin (1948) conducted a market experiment in which prices and quantities failed to converge to the competitive equilibrium. • Subjects bargained bilaterally. • Trading prices were written on the blackboard. • Chamberlin s aim was to refute the competitive model. 9/11/2010 EC3322 Autumn 2010 6
Chamberlin market: An example 9/11/2010 EC3322 Autumn 2010 7
Chamberlin market: Who trades?
• Circles denote traders who successfully bargained. • Conditionally efficient because no further profitable trades were possible. • Inefficient because many extramarginal traders were successful. 9/11/2010 EC3322 Autumn 2010 8
Chamberlin market: conclusion • Chamberlin concludes that markets do not work in this situation: • Perhaps it is the perfect Market which is „strange ; at any rate, the nature of the discrepancies between it and reality deserves study. • What was the problem? 9/11/2010 EC3322 Autumn 2010 9
6.3 Smith s Experiment • V. Smith, a former Harvard student changed Chamberlin s trading institution in the following way:
– Instead of having subjects circulate and make bilateral deals he used the oral double auction procedure. – He also implemented the method of stationary replication , which is a sequence of trading days with stationary demand and supply schedules. • These two changes seemed to me the appropriate modifications to do a more credible job of rejecting competitive price theory, which after all, was for teaching, not believing... (Smith 1991, p. 155). 9/11/2010 EC3322 Autumn 2010 10
The Double Auction • Developed by Vernon Smith (1962), similar to the Pit Market • There is a number of buyers and sellers who have induced demand and cost, as above • There is usually no informa1on about the cost and values of the other traders (private, incomplete informaBon) • Both buyers and sellers can acBvely offer/bid and accept prices • All price offers and bids and acceptance decisions are made public • There is an improvement rule, that is, bids (offers) must be successively higher (lower) • “buyer 3 bids $1.20” -‐ “seller 4 asks $1.80” -‐ “seller 3 asks $1.40” -‐ “buyer 2 accepts $1.40” -‐ “seller 2 accepts $1.20” • Any bids or asking prices remain on the blackboard (or computer screen); when a contract is made, the previous asks and bids are valid again 9/11/2010 EC3322 Autumn 2010 11
Result: Symmetric supply and demand functions 9/11/2010 EC3322 Autumn 2010 12
Chart 1: from Smith (1962) Robustness check I:
flat supply- and demand functions 9/11/2010 EC3322 Autumn 2010 13 From: Smith (1962) Robustness check II: Changes in the supply- & demand functions 9/11/2010 EC3322 Autumn 2010 14 From:
Smith(1962) è quick reaction Robustness check III: Buyers are on the short side of the market 9/11/2010 EC3322 Autumn 2010 15 From:
Smith (1962) Robustness check IV: sellers are on the short side of the market I 9/11/2010 EC3322 Autumn 2010 16 Nach Davis/Holt Experimental Economics From: Smith (
1962 )
Robustness check V: sellers are on the short side of the market II 9/11/2010 EC3322 Autumn 2010 17 From:
Smith (1962) Robustness check VI: The Effects of Experience 9/11/2010 EC3322 Autumn 2010 18 Based on Davis & Holt (1993) Robustness Check VII: Extreme Earnings Inequality 9/11/2010 EC3322 Autumn 2010 19
Robustness Check VIII: Cyclical Supply and Demand 9/11/2010 EC3322 Autumn 2010 20
Summary I • Main result: – Symmetric supply-‐ and demand funcBons (Chart 1; Smith 1962) – Prices converge, i.e., α declines • Further findings (less important and robust?) – Charts 2/3: beXer convergence for flat supply-‐ and demand funcBons (range of offers!) – Chart 5: Quick reacBon to changes in the supply-‐ and demand funcBons – Charts 4/6/7: division of rents has an impact on the direcBon of convergence • Chart 4: Buyers are on short side, sellers earn almost nothing, prices come slowly from above • Chart 6/7: Sellers earn relaBvely high rents, buyers show resistance to pay high prices, convergence from below 9/11/2010 EC3322 Autumn 2010 21
Summary • Relatively quick convergence of prices – Without knowledge of supply and demand functions – Few traders – Inexperienced traders, short time to learn – Trade without auctioneer, all traders are price makers and price takers 9/11/2010 EC3322 Autumn 2010 22
It can t be true! I am still recovering from the shock of the experimental results. The outcome was unbelievably consistent with competitive price theory. ... But the result can t be believed, I thought. It must be an accident, so I will take another class and do a new experiment with different supply and demand schedules.
(Smith 1991, p. 156) 9/11/2010 EC3322 Autumn 2010 23
Summing Up (Smith, 1991, p. 157) • In 1960 I wrote up my results and thought that the obvious place to send it was the Journal of PoliBcal Economy. It s surely a natural for those Chicago guys, I thought. What have I shown? • I have shown that with – remarkably liXle learning, – strict privacy, and – a modest number [of traders], – inexperienced traders converge rapidly to a compeBBve equilibrium under the double aucBon insBtuBon mechanism. The market works under much weaker condiBons than had tradiBonally been thought to be necessary. – You didn t have to have large numbers. – Economic agents do not have to have perfect knowledge of supply and demand. – You do not need price-‐taking behavior -‐ everyone in the double aucBon is a price maker as much as a price taker. • A great discovery, right? Not quite, as it turned out. At Chicago they already knew that markets work. Who needs evidence? 9/11/2010 EC3322 Autumn 2010 24
Experimentalists’ Policy Advice on Auctions • Starting with the double auction, experimentalists have developed expertise for
• Successful policy advice of experimentalists include the design of – environmental permit auctions in the US – the 3G Mobile Phone auction in the UK – and electricity spot markets in the US • This success in policy advice of experimental economists can be traced back to these early double auction experiments 9/11/2010 EC3322 Autumn 2010 25
Example of a Flawed Experimental Design: Double Auctions - “The Multi Unit Case” • Early double aucBons involved single-‐unit buyers and sellers; they converged to the compeBBve equilibrium • Williams (Rev. Econ. Stud., 1973) extended the one-‐sided aucBons to “the mul1-‐unit case”. He found that markets are not compe11ve any more • But Williams had changed the trading ins1tu1on at the same Bme: “In my experiments, price offers were posted at the beginning of each period and could not be changed during a trading period” • Later research found that it is the trading insBtuBon that changes the results, not the mulB-‐unit setup • Lesson from this: never change two aspects of the design at once! You can only compare across different treatments when you change one design feature only. You have to keep everything else equal. 9/11/2010 EC3322 Autumn 2010 26
Design Issue: 2x2 Treatment Design
• How to design an experiment which cleanly solves the above problem (mulB-‐unit setup versus different trading insBtuBon)? • So-‐called 2x2 treatment design • Old research by Smith was treatment A, Williams’ D • Only by doing treatments B and C as well can we find out the real reasons for the change in results • Comparing A, B, C and D, it is clear that it was not the mulB-‐unit semng that caused the different result; it was the trading insBtuBon 9/11/2010 EC3322 Autumn 2010 27 Double Auction Williams’ new trading institution single unit A competitive B not competitive multi unit
6.5 Posted offer markets • Williams had unintentionally proposed a new and (as it turned out later) very popular trading institution, the Posted-Offer market • Similar to retail markets: in contrast to the Double Auction sellers simultaneously post prices only once per period; haggling is not allowed
• Sellers set a price and fix a maximum number of units they intend to sell • Then buyers shop in a random sequence and buy from sellers of their choice • Posted-Offer markets “tend to have higher
adjustment tends to be from above” and may “not converge at all” (Charles Plott) 9/11/2010 EC3322 Autumn 2010 28
Prices and Efficiency in a Posted Offer Market 9/11/2010 EC3322 Autumn 2010 29
From Davis & Holt 1993:
• Solid dots: contract prices • Empty boxes: nonaccepted • Results Ø Slow convergence Ø Convergence from above Ø Initially efficiency very low
Responsiveness of Double Auction and Posted Offer Markets to Demand Shocks • Demand increases unBl period 8 and falls from Period 9 onwards. • Results double aucBon – IniBally, most prices in the DA are below CE. Aner the negaBve shock they are above CE. –
CE very well. • Results posted offer market – In the PO-‐market actual prices bear no resemblance to the CE-‐prices. They sBll rise when demand is already falling creaBng zero trades in period 13 and 14 (stagflaBon). 9/11/2010 EC3322 Autumn 2010 30
Conclusion • Different market institutions can be set up in the lab: • Double auction. • Single sides auction (not discussed). • Posted offer market. • In the double auction market equilibrium is a good predictor for the number of trades as well as for the closing price. • In the posted offer market, convergence to market equilibrium is much slower. 9/11/2010 EC3322 Autumn 2010 31
Problem Set 1. Double aucBons assume that the demand and cost parameters remain constant all the Bme. In reality, cost and demand shocks (changes) onen occur. What would be the appropriate experimental design to analyse demand changes in a double aucBon experiment? 2. Experimental economists want to contribute to the efficient design of pension schemes. The experiment involves the consumpBon choices over Bme where the players’ death occurs at a random point. Can this be done in the lab? 3. Someone quesBons the relevance of double aucBon results. “People in the real world rarely trade in this manner. Therefore, I do not believe more strongly in the concept of compeBBve equilibrium than before.” Comment on this objecBon. 4. Rearrange the Pit Market cost schedule in the lecture notes such that you start with the highest cost value and end with the lowest. How many units can be traded? How many prices are possible? How can welfare change? 9/11/2010 EC3322 Autumn 2010 32
Problem Set
5. Suppose you wanted to do the above experiment by Williams. In addiBon to analysing single unit versus mulBple units and double aucBon versus posted-‐offer rule, you want to analyse single seller (monopoly) versus mulBple seller (compeBBon). What would be the appropriate treatment design? How many addiBonal treatments would you have to do? 6. Why is the Double AucBon not a game? Write down a Posted-‐ Offer markets as an extensive form game. 7. Calculate the (mixed strategy) Nash equilibrium for the above posted-‐offer market. What is the Nash profit of the sellers? What is the Nash equilibrium distribuBon? 8. Someone argues: “The mixed strategy Nash equilibrium is far too difficult to compute even for a trained economists to be of any relevance for experimental research”. Discuss. 9/11/2010 EC3322 Autumn 2010 33 Yüklə 1,99 Mb. Dostları ilə paylaş:
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