Testing the Boundaries of the Double Auction: The Effects of Complete Information and Market Power

45 Pages Posted: 1 Mar 2017 Last revised: 8 Feb 2018

See all articles by Erik O. Kimbrough

Erik O. Kimbrough

Chapman University - The George L. Argyros School of Business & Economics

Andrew Smyth

Marquette University - Department of Economics

Date Written: January 2, 2018

Abstract

We report boundary experiments testing the robustness of price convergence in double auction markets for non-durable goods in which there is extreme earnings inequality at the competitive equilibrium (CE). Following up on a conjecture by Smith (1980), we test whether the well-known equilibrating power of the double auction institution is robust to the presence of complete information about traders' values and costs and the presence of symmetric market power. We find that complete information is insufficient to impede convergence to CE prices; however, introducing market power consistently causes prices to deviate from the CE, whether or not subjects possess complete information. Our design highlights the value of boundary experiments in understanding how market institutions shape behavior, and our findings help delineate the limits of the double auction institution to generate competitive outcomes.

Keywords: Double Auction, Market Power, Institutions, Information, Experimental Economics

JEL Classification: C92, D02, D43, D44, L13

Suggested Citation

Kimbrough, Erik O. and Smyth, Andrew, Testing the Boundaries of the Double Auction: The Effects of Complete Information and Market Power (January 2, 2018). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2924747 or http://dx.doi.org/10.2139/ssrn.2924747

Erik O. Kimbrough (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

One University Dr
Orange, CA 92866
United States

Andrew Smyth

Marquette University - Department of Economics ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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