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Experimental methods are now a mainstream empirical methodology in economics. The papers in this volume represent some recent developments in research on experimental markets. The articles span a variety of topics related to experimental markets, including auctions, taxation, institutional differences, coordination in markets, and learning. Contributors to the volume include many of the most distinguished researchers in the area.



The experimental study of market behavior

Over the past two decades, experimental methods have entered the mainstream as one of the empirical methodologies of economic science. Early experimental work focused on issues in individual decision-making and industrial organization, but in recent years economists have applied laboratory methods to study topics in macroeconomics, international economics, information economics, finance, and other fields. Applied economists have also conducted experiments to gather data expressly for use in policy debates. The broadening of the domain of experimental economics has created several clearly identifiable branches of the field. The focus of this volume is one of these branches, the study of the behavior of markets. The papers in this volume represent several current directions of research on experimental markets.
Timothy N. Cason, Charles Noussair

Concurrent trading in two experimental markets with demand interdependence

We report results from fifteen computerized double auctions with concurrent trading of two commodities. In contrast to prior experimental markets, buyers’ demands are induced via CES earnings functions defined over the two traded goods, with a fiat money expenditure constraint. Sellers receive independent marginal cost arrays for each commodity. Parameters for buyers” earnings functions and sellers’ costs are set to yield a stable, competitive equilibrium. In spite of the complexity introduced by the demand interdependence, the competitive model is a good predictor of market outcomes, although prices tend to be above (below) the competitive prediction in the low-price (high-price) market.
Arlington W. Williams, Vernon L. Smith, John O. Ledyard, Steven Gjerstad

Some factors affecting demand withholding in posted-offer markets

Both oligopoly theory and experiments are concerned almost uniquely with sellers’ behavior. Buyers’ ability to exhibit non-trivial behavior in different market institutions remains unaddressed. This paper investigates the impact of three variables (number of buyers, surplus division at the market-clearing price and information revelation) on strategie and fairness-motivated demand withholding. Demand withholding and its ability to force lower prices increase as the number of buyers or theshare of surplus earned by the buyers decreases. However, increasing the information revealed to subjects about the surplus inequality favoring seHers mildly facilitates coHusion among sellers rather than provoking demand withholding as conjectured.
Bradley J. Ruffle

Firm-specific cost savings and market power

We report a policy experiment that illustrates a potential problem of using historical pass-through rates as a means of predicting the competitive consequences of projected firm-specific cost savings in antitrust contexts, particularly in merger analysis. The effects of cost savings on welfare can vary vastly, depending on how the savings affect the industry supply schedule. In a capacity-constrained price-setting oligopoly, we observe that cost savings can overwhelm behaviorally salient market power incentives when the savings affect marginal (high cost) units. However, cost savings of the same magnitude on an infra-marginal unit leave market power unchanged.
Douglas D. Davis, Bart J. Wilson

An experimental comparison of two search models

We report an experiment designed to investigate markets with consumer search costs. In markets where buyers are matched with one seller at a time, sellers are predicted to sell at prices equal to buyers’ valuations. However, we find sellers post prices that offer a more equal division of the surplus, and these prices tend to be accepted, while prices doser to the equilibrium prediction are rejected. At the other extreme, sellers are predicted to sell at a price equal to marginal cost when buyers are matched with two sellers at a time. Here, we find prices are doser to, but still significantly different from, the equilibrium prediction. Thus, our results support theoretical comparative static, but not point, predictions.
Eric Abrams, Martin Sefton, Abdullah Yavas

Intertemporal pricing in laboratory posted offer markets with differential information

This paper analyzes intertemporal seller pricing and buyer purchasing behavior in a laboratory retail market with differential information. A seller posts one price each period that a buyer either accepts or rejects. Trade occurs over a sequence of “market periods” with a random termination date. The buyer and seller are differentially informed: The seller’s cost of producing a unit of a fictitious good is known and constant in all periods, but the buyer’s value for the good (demand) is a random variable govemed by a Markov Process whose structure is common knowledge. At the beginning of each period the unit' s value is determined by “nature” and is privately revealed only to the buyer. The market termination rule is a binary random variable. We conduct 32 laboratory experiments designed to study intertemporal pricing by human subjects in the Posted Offer Institution when demand follows a stochastic process. There are four series of experiments: 8 with simulated buyers, 8 with inexperienced subjects, 8 with once experienced subjects, and 8 with twice experienced subjects.
Aldo Rustichini, Anne P. Villamil

Dividend timing and behavior in laboratory asset markets

This paper investigates the effect of dividend timing on price bubbles and endogenous expectations in twenty-six laboratory asset markets. In ten “Al” markets, a single dividend is paid at the end of the trading horizon. In nine “A2” markets, dividends are paid at the end of each trading period. In seven “A3” markets, some of the dividends are paid at the end of the trading horizon, and the rest are paid on a per-period basis. The results indicate that price bubbles are most likely in A2 markets, less likely in A3 markets, and least likely in Al markets. Six distinct hypotheses are considered. The data suggest that the concentration of dividend value at a single point in time helps to create common expectations, and thus significantly reduce the incidence of bubbles. Also, the results underscore the difficulty facing econometric tests on field data where fundamental value has to be approximated.
Vernon L. Smith, Mark van Boening, Charissa P. Wellford

Bidding up, buying out and cooling-off: an examination of auctions with withdrawal rights

This paper considers a model in which bidders in an auction are faced with uncertainty as to their final valuation of the auctioned object. This uncertainty is resolved after the auction has taken place. It is argued that the inclusion of a cooling-off right raises the expected revenue to the seHer when bidders face a risk of the object being a strict ‘bad’, in that owning the object incurs negative utility to the winner of the auction. The model is then tested in a laboratory setting. The evidence from this experiment supports the predictions of the theory.
J. Asker

Markets for contracts: experiments exploring the compatibility of games and markets for games

The research explores the relationship between games and the economic environment in which the games might be embedded. The focus is on a market institution in which agents buy and sell rights to participate in a follow on stage of strategic interaction. The central question posed concems how two different types of processes, the game and the market, interact. The market converges to a competitive equilibrium that is consistent with the Nash equilibrium that obtains in the game, and the convergence of the market to a competitive equilibrium lags the convergence of behaviors in the game to a Nash equilibrium.
Charles R. Plott, Dean V. Williamson

An experimental study of coordination and learning in iterated two-market entry games

Tacit coordination in large groups is studied in an iterated market entry game with complete information and multiple market capacities that are varied randomly from period to period. On each period, each player must decide independently whether to enter any of the markets, and if entering, which of the two markets to enter. Across symmetric and asymmetric markets, we find remarkable coordination on the aggregate level, which is accounted for by the Nash equilibrium, together with considerable individual differences in frequency of entry and decision rules. With experience, the decisions of most players converge to decision rules with cutoff values on the combined market capacity that determine whether or not to enter but not which of the two markets to enter. This latter decision is determined probabilistically by the differential market capacities. The aggregate and individual results are accounted for quite well by a reinforcement-based learning model that combines deterministic and probabilistic elements.
Amnon Rapoport, Darryl A. Seale, Eyal Winter

Experience-weighted attraction learning in sender-receiver signaling games

We apply Camerer and Ho’s experience-weighted attraction (EWA) model of learning to extensive-form signaling games. Since these games often have many equilibria, logical ‘refinements’ have been used to predict which equilibrium will occur. Brandts and Holt conjectured that belief formation could lead to less refined equilibria, and confirmed their conjecture experimentally. Our adaptation of EWA to signaling games includes a formalization of the BrandtsHolt belief formation idea as a special case. We find that the Brandts-Holt dynamic captures the direction of switching from one strategy to another, but does not capture the rate at which switching occurs. EWA does better at predicting the rate of switching (and also forecasts better than reinforcement models). Extensions of EWA which update unchosen signals by different functions of the set of unobserved foregone payoffs further improve predictive accuracy.
Christopher M. Anderson, Colin F. Camerer

Theoretically robust but empirically invalid? An experimental investigation into tax equivalence

The idea that the final distribution of the tax burden (economic incidence) does not depend on the initial distribution of tax liabilities (statutory incidence) is referred to as the Liability Side Equivalence principle. This paper tests this principle in the laboratory and findsthat subjects who actually have to pay the tax carry a higher tax burden. It is argued that this violation of Liability Side Equivalence is due to the fact that a change in the distribution of tax liabilities induces a shift in behaviorally relevant social norms. This shift, in turn, affects the impact of the tax. Our results explain some striking empirical observations and have important theoretical and practical implications.
Rudolf Kerschbamer, Georg Kirchsteiger
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