Experimental Economics

PhD Micro Unit 2: Markets

Steffen Huck University College London

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Experimental Economics

Chamberlin (1948)

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First market experiment in the history of economics Chamberlin wanted to illustrate how deviations from perfectly competitive equilibrium can arise Subjects could each trade one unit of a good Demand and supply prices were induced (number on a card) Bilateral negotiations

Experimental Economics 25/02/2008

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Chamberlin cont’d

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Chamberlin cont’d

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Chamberlin cont’d

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Chamberlin cont’d

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Altogether, he conducted 46 markets Sales volume was higher than equilibrium volume in 42 cases, identical in 4. Average price was higher than equilibrium 7 times, lower 39 times. These patterns cannot have been created by chance. Binomial tests could be applied. It is not safe to assume Walrasian equilibria even if there are many traders.

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Smith (1962)

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Same basic setup as in Chamberlin But negotiations are not bilateral. Instead offers are made publicly with both, buyers and sellers, making offers. Whoever shouts “accepted” or “yes” clinches the deal. Double oral auction Repeated in several periods with same roles and values

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Smith cont’d

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More seller power

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Changes in demand, doctoral students

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Posted-offer market (sellers post price)

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Smith cont’d

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Market institutions matter Exact shape of...