Information and Coordination Frictions in Experimental Posted Offer Markets

22 Pages Posted: 10 May 2016 Last revised: 5 Dec 2016

See all articles by Leif Helland

Leif Helland

BI Norwegian Business School - Department of Economics

Espen R. Moen

BI Norwegian Business School; Centre for Economic Policy Research (CEPR)

Edgar Preugschat

Technical University of Dortmund

Date Written: October 21, 2016

Abstract

We experimentally investigate buyer and seller behavior in small markets with two kinds of frictions. First, a subset of buyers may have (severely) limited information about prices, and choose a seller at random. Second, sellers may not be able to serve all potential customers. Such capacity constraints can lead to coordination frictions where some sellers and buyers may not be able to trade. Theory predicts very different equilibrium outcomes when we vary the set-up along these two dimensions. In particular, it implies that a higher number of informed buyers will lead to lower prices when sellers do not face capacity constraints, while prices may actually increase if sellers are capacity constrained, as shown by Lester (AER 2011). In the experiment, the differences between the constrained and non-constrained case are confirmed; prices fall when sellers are not capacity constrained but either do not fall by much or even increase when they are not. We find that prices are quite close to the predicted equilibrium values except in treatments where unconstrained sellers face a large fraction of informed buyers. However, introducing noise into the theoretical decision making process produces a pattern of deviations that fits well with the observed ones.

Keywords: Posted offer markets, information frictions, coordination frictions, laboratory experiments

JEL Classification: C92, D43, D45

Suggested Citation

Helland, Leif and Moen, Espen R. and Preugschat, Edgar, Information and Coordination Frictions in Experimental Posted Offer Markets (October 21, 2016). Available at SSRN: https://ssrn.com/abstract=2777438 or http://dx.doi.org/10.2139/ssrn.2777438

Leif Helland

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

Espen R. Moen

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Edgar Preugschat (Contact Author)

Technical University of Dortmund ( email )

D-44221 Dortmund
Germany

HOME PAGE: http://https://sites.google.com/site/epreugschat/

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