Academic journal article Economic Inquiry

Posted Offer Markets in Near-Continuous Time: An Experimental Investigation

Academic journal article Economic Inquiry

Posted Offer Markets in Near-Continuous Time: An Experimental Investigation

Article excerpt

I. INTRODUCTION

Posted offer markets occupy a central place in the laboratory investigation of market behavior. The posting of price decisions by sellers to consumers on a take-it-or-leave-it basis parallels important elements of naturally occurring retail markets. The simultaneous-move feature of sellers' price-posting decisions also parallels the structure of Bertrand-Edgeworth competition, a standard focus attention in industrial organization economics. In general, markets organized under posted offer rules converge robustly to competitive predictions. Indeed, the general tendency of posted offer markets to generate competitive outcomes represents an instance of Smith's (1982) "Hayek Hypothesis" that private information regarding costs or values, along with the public messages of the markets (e.g., the posted prices), often suffice to generate competitive outcomes.

Nevertheless, in a number of circumstances, the organizing power of equilibrium predictions in posted offer markets is, at best, incomplete. For example, as Davis and Holt (1993) and Walker and Williams (1993) report, posted offer monopolists tend to incompletely extract the available profits. Experiments by Davis, Harrison, and Williams (1993) and Davis and Holt (1997) further indicate that sellers in standard implementations of the posted offer institution respond poorly (and in some instances abysmally) to demand shocks. Again, in a "swastika" design studied by Cason and Williams (1990), posted offer sellers respond asymmetrically to conditions of excess supply and demand. In such a design, sellers have a common unit cost and buyers have a common unit value. Relatively subtle alterations in the total number of units allocated to sellers relative to buyers cause the competitive equilibrium prediction to swing from the buyers' values to sellers' unit costs. Under conditions of excess demand, sellers adjust fully to buyers' values. However, given excess supply, prices drop incompletely toward unit costs.

In principle, these deviations from equilibrium outcomes may be quite important as they suggest that institutional features of posted offer pricing may drive similar phenomena observed in some naturally occurring contexts. The slow response of posted offer sellers to demand shocks, for example, represents the sort of friction that Neo-Keynesians use to motivate an upward-sloping aggregate supply schedule. Similarly, the comparatively slow and incomplete downward adjustment of prices to conditions of excess supply in the swastika design is reminiscent of the "rockets and feathers" pricing patterns that characterize pricing in retail gasoline markets.

Many economists treat dismissively these potential policy implications. Despite the comparative simplicity of the laboratory markets, they argue, the limited number of decisions in a conventional laboratory session fails to generate an experience profile sufficient to allow the emergence of equilibrium outcomes. (1) Traditionally, experimentalists have attempted to increase experience profiles by inviting participants who participated once in a particular environment back for a second or even a third time to participate in "experienced" or "twice-experienced" markets. (2) This approach has at least two shortcomings. First, participants experienced in this way do not necessarily get the right type of experience. The market (or game) starts anew with each new session; thus, even experienced participants gain only limited insight into the decisions of others in their market. This sort of experience offers only limited insight, for example, into the capacity of sellers to coordinate activities by sending and responding to price signals. Second, and more important, generating extended experience profiles in this way is quite expensive, in terms of both subject payment fees and time spent by an investigator in the laboratory.

This paper introduces an alternative tool for increasing participant experience profiles in the posted offer institution. …

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