BID Brown Bag Seminar: A New Approach to Experimental Markets with Avoidable Costs

Research Cluster

Speaker:Luke Lindsay, University of Exeter
Date: Tuesday 25 October 2016
Time: 12.30 - 13.30
Location: Constantine Leventis Teaching Room, Building One

Further details

In many laboratory settings, the continuous double auction is the most efficient trading institution. However, in market structures with avoidable fixed costs, van Boening & Wilcox (1996) observed wild price and efficiency dynamics. Subsequent studies have tested a range of other market designs in this setting; however, mechanisms that reliably deliver high efficiency in markets with avoidable costs have remained elusive. We experimentally test four market mechanisms. First, a continuous double auction where the order book is hidden. Second, a continuous double auction where the order book is visible to traders. Third, a call market where sellers submit supply schedules and buyers submit demand schedules. Fourth, a mechanism where traders submit schedules in continuous time. Provisional transactions are shown and traders may update their schedules subject to an improvement rule. The market closes when no improved schedules have been submitted for a period of time and at this point the standing provisional transactions are executed. The main result is that the mechanisms where traders submit schedules give higher efficiency than the double auctions, with the mechanism that allows for updating schedules delivering the highest efficiency overall. Authors: Jacob Goeree, Luke Lindsay, and Xavier del Pozo