Summary: Students participate in a posted offer market experiment that includes an exogenous demand shift and an exogenous supply shift sequentially. Time paths of observed asked prices, contract prices, competitive equilibrium prices, generated efficiency levels and distribution of gains are displayed graphically.
Motivation: Posted-Offer Markets are frequently used in society - retail markets are a familiar example. Teaching Posted-Offer Markets may involve following questions:
Participation in a posted offer market experiment provides students with experience of the market, trains their intuition, and helps them better understand the properties of this institution.
- Why such an institution exists?
- Which type of markets favor it?
- How does it perform in comparison with one-sided auctions and double auctions?
This posted offer market configuration supports up to 18 subjects - 9 sellers and 9 buyers. Buyer and seller role assignments alternate as subjects connect (e.g., if only 12 subjects join the game, then there will be 6 sellers and 6 buyers).
After running the experiment, an informal discussion can be carefully guided to cover issues such as:
- how posted prices were chosen,
- what drove their adjustments,
- which prices were more likely to lead to sales,
- what were gains from trade,
- how were gains distributed between the seller and the buyer involved in the trade,
- how these gains relate to market efficiency,
- how the efficiency changed with repetition,
- what were the competitive market predictions,
- which elements were involved in transmitting structural (demand, supply shocks) changes and so on.
For a formal discussion, see Davis D. D. and C.A. Holt, 1993. Experimental Economics, Princeton University Press.
In the presence of thick markets, like buyers in retail markets, one-sided and double auctions are characterized by high negotiation costs. Posted-offer markets present a market institution with negotiation costs that are significantly lower. In this institution, agents on one side of the market, normally sellers, simultaneously post :take-it-or-leave-it" prices and buyers simply shop for goods at the posted prices. A simple (computerized) trading rule goes as follows. A number of sellers and buyers interact in the following order:
Observed behavior in the laboratory reveals that this institution, in the absence of market power:
- Sellers decide their prices simultaneously and privately. Each seller chooses a price and quantity she would like to sell at that price.
- After all sellers have made their decisions, prices but are revealed to everyone in the market.
- Buyers make their decisions sequentially and according to a random order. During his turn, a buyer decides from which available sellers he will purchase, and how many available units he will buy.
- After all buyers have the chance to make their purchases, the market closes. Each seller earns for each sold unit the difference between the posted price and its production cost whereas each buyer earns for each bought unit the difference between the unit's value for the buyer and the paid price.
- The market re-opens for the next trading period, and the interactive process is a repetition of the previous steps.
However, in the presence of market power competitive equilibria are poor predictors.
- drives prices to competitive equilibrium level;
- slows down the speed of convergence compared with one-sided auctions and double auctions;
- generates prices that are higher than the competitive equilibrium price;
- generates a surplus that (i) increases with repetition, (ii) favors the active side of the market, and (iii) is smaller than the one observed in one-sided and double auctions;
- is rigid with respect to changes in demand but it is sensitive to changes in supply.