Principles of Continuous Price Determination in an Experimental Environment with Flows of Random Arrivals and Departures

49 Pages Posted: 15 Jan 2008 Last revised: 2 Feb 2008

See all articles by Michael R Alton

Michael R Alton

California Institute of Technology - Division of the Humanities and Social Sciences

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: September 21, 2007

Abstract

This paper develops a new experimental environment for the study of markets. The period structure of classical experimental markets, which is known to play an important role in the equilibration process, is replaced by an environment, in which incentives arrive randomly and continuously throughout. The issue posed is whether classical principles of market behavior apply in worlds where the environment is constantly changing. We developed an experimental methodology within which the issue can be studied. Three broad classes of results emerge. (1) Natural flow generalizations of the classical laws of demand and supply dictate much of the behavior observed in the markets. (2) Two different classes of laws operate: one we call the temporal equilibrium, which is based on the parameters that exist in the market at a moment in time, and the second is the flow competitive equilibrium, which reflects the underlying probabilistic structure of the parameters. (3) The markets themselves exhibit extraordinarily high levels of efficiency.

Keywords: Price discovery, Equilibration, Continuous double auctions

JEL Classification: A10, C91, C70, C90, C91, D40, D44, G10

Suggested Citation

Alton, Michael R and Plott, Charles R., Principles of Continuous Price Determination in an Experimental Environment with Flows of Random Arrivals and Departures (September 21, 2007). Available at SSRN: https://ssrn.com/abstract=1083863 or http://dx.doi.org/10.2139/ssrn.1083863

Michael R Alton (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

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