Rational Frenzies and Crashes

28 Pages Posted: 27 Jun 2007

See all articles by Jeremy Bulow

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Paul Klemperer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 1991

Abstract

Most markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide between buying now or later, rather than only now or never, buyers' current 'willingness to pay' is much more sensitive to price than is the demand curve. A consequence is that markets will be extremely sensitive to new information, leading to both 'frenzies, " where demand feeds upon itself, and "crashes," where price drops discontinuously. Although no buyer's independent reservation value reveals much about overall demand, a small increase in one such value can cause a large increase or decrease in average price.

Suggested Citation

Bulow, Jeremy I. and Klemperer, Paul, Rational Frenzies and Crashes (September 1991). NBER Working Paper No. t0112. Available at SSRN: https://ssrn.com/abstract=995155

Jeremy I. Bulow (Contact Author)

Stanford University ( email )

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National Bureau of Economic Research (NBER)

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Paul Klemperer

University of Oxford - Department of Economics ( email )

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+44 1865 278 588 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

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