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Article Excerpt
I. INTRODUCTION
Posted offer markets occupy a central place in the laboratory investigation of market behavior. The posting of price decisions by sellers to consumers on a take-it-or-leave-it basis parallels important elements of naturally occurring retail markets. The simultaneous-move feature of sellers' price-posting decisions also parallels the structure of Bertrand-Edgeworth competition, a standard focus attention in industrial organization economics. In general, markets organized under posted offer rules converge robustly to competitive predictions. Indeed, the general tendency of posted offer markets to generate competitive outcomes represents an instance of Smith's (1982) "Hayek Hypothesis" that private information regarding costs or values, along with the public messages of the markets (e.g., the posted prices), often suffice to generate competitive outcomes.
Nevertheless, in a number of circumstances, the organizing power of equilibrium predictions in posted offer markets is, at best, incomplete. For example, as Davis and Holt (1993) and Walker and Williams (1993) report, posted offer monopolists tend to incompletely extract the available profits. Experiments by Davis, Harrison, and Williams (1993) and Davis and Holt (1997) further indicate that sellers in standard implementations of the posted offer institution respond poorly (and in some instances abysmally) to demand shocks. Again, in a "swastika" design studied by Cason and Williams (1990), posted offer sellers respond asymmetrically to conditions of excess supply and demand. In such a design, sellers have a common unit cost and buyers have a common unit value. Relatively subtle alterations in the total number of units allocated to sellers relative to buyers cause the competitive equilibrium prediction to swing from the buyers' values to sellers' unit costs. Under conditions of excess demand, sellers adjust fully to buyers' values. However, given excess supply, prices drop incompletely toward unit costs.
In principle, these deviations from equilibrium outcomes may be quite important as they suggest that institutional features of posted offer pricing may drive similar phenomena observed in some naturally occurring contexts. The slow response of posted offer sellers to demand shocks, for example, represents the sort of friction that Neo-Keynesians use to motivate an upward-sloping aggregate supply schedule. Similarly, the comparatively slow and incomplete downward adjustment of prices to conditions of excess supply in the swastika design is reminiscent of the "rockets and feathers" pricing patterns that characterize pricing in retail gasoline markets.
Many economists treat dismissively these potential policy implications. Despite the comparative simplicity of the laboratory markets, they argue, the limited number of decisions in a conventional laboratory session fails to generate an experience profile sufficient to allow the emergence of equilibrium outcomes. (1) Traditionally, experimentalists have attempted to increase experience profiles by inviting participants who participated once in a particular environment back for a second or even a third time to participate in "experienced" or "twice-experienced" markets. (2) This approach has at least two shortcomings. First, participants experienced in this way do not necessarily get the right type of experience. The market (or game) starts anew with each new session; thus, even experienced participants gain only limited insight into the decisions of others in their market. This sort of experience offers only limited insight, for example, into the capacity of sellers to coordinate activities by sending and responding to price signals. Second, and more important, generating extended experience profiles in this way is quite expensive, in terms of both subject payment fees and time spent by an investigator in the laboratory.
This paper introduces an alternative tool for increasing participant experience profiles in the posted offer institution. The basic idea is disarmingly simple. Rather than allowing sellers to proceed at their own paces, we truncate sharply the duration of decision periods so that more decision periods can fit into a single session. Increasing decision profiles in this way is not without some parallels to natural contexts, particularly when making comparisons across trading institutions. Economists, for example, often evaluate posted offer market performance in light of markets organized under double auction trading rules. But high-value items, such as stocks and other financial instruments, typically trade in double auction markets. In contrast, exchange in posted offer markets is often characterized by the exchange of relatively low-value consumer goods. In order to match the dollar volume associated with a single representative double auction transaction, sellers of many consumer goods may have multiple opportunities to revisit their pricing decisions.
The idea of increasing the number of periods in repeated simultaneous-move games to better evaluate equilibrium predictions is not entirely novel. Alger (1987) reports an experiment showing that extensive repetition in a posted offer market can generate considerably more cooperation than has been traditionally observed in markets of shorter duration. Some of Alger's markets lasted more than 140 periods. Notably, however, the excessive temporal duration of some of the sessions reported by Alger provoked concern regarding the motivation for participant decisions. (3) Other investigators have attempted to increase experience profiles using either continuous or extremely condensed decision periods. In particular, Deck and Wilson (2002, 2003, 2007) use such techniques to evaluate policy issues pertinent to e-commerce and retail gasoline pricing. (4) Also, Millner, Pratt, and Reilly (1990) study a "flow" market, where buyers and sellers trade streams of goods that are both produced and consumed continuously. None of these studies, however, explicitly considers the extent to which reducing the period length affects the performance of markets organized under posted offer trading rules. (5)
To evaluate the effect of extensive repetition on posted offer market performance, we study the three contexts mentioned above, where equilibrium predictions have emerged incompletely in previous investigations: (a) a monopoly pricing exercise; (b) a "trend demand" design, where a series of demand shocks results first in an inflationary and then in a deflationary pattern of equilibrium price adjustments; and (c) a swastika design, characterized by extreme earnings inequities. In overview, experimental results indicate that while price adjustments in single time-truncated "short" periods are somewhat slower than in standard "long" trading periods, equilibrium predictions emerge more completely in the near-continuous framework than in the standard laboratory posted offer market implementation. Nevertheless, in some important respects, convergence remains incomplete. Further, we find that extensive repetition allows insights into price adjustment dynamics that could not be observed in markets of shorter duration. In particular, sellers adjust more slowly to inflationary demand shocks than to comparable deflationary demand shocks. Sellers also respond more quickly and completely to conditions of excess demand than to conditions of excess supply.
We organize this paper as follows. Section II introduces the near-continuous posted offer framework and presents the experimental design. Section III presents results. We offer some parting comments in a short fourth section.
II. THE NEAR-CONTINUOUS FRAMEWORK AND THE EXPERIMENT DESIGN
Near-Continuous Posted Offer Market
For the most part, trading in our near-continuous implementation of the posted offer institution follows standard posted offer procedures. At the outset of each period, sellers, endowed with unit costs, simultaneously make pricing decisions. Once all price-posting decisions are complete, a public display of prices appears and a simulated buyer makes purchases. (6) The period concludes by showing each seller his or her own period sales and earnings. Figure 1 shows the screen display seen by a Seller S1 in a computerized implementation of a posted offer market, as this seller decides on a price in Period 4. As we can see, in Period 3, Seller SI sold four units at a price of $2.10 per unit and earned $2.00. Sellers $2, $3, and $4 posted prices of $1.80, $1.60, and $2.00, respectively. In Period 4, Seller S1 may offer up to six units for sale, with unit costs ranging from a low of $1.30 for the first unit to a high of $2.70 for the sixth unit.
Our near-continuous institution differs from the standard posted offer implementation in that we supplement the tabular display of prices shown at the top of the panel, with a graphical representation of price postings for the period (shaded bars) and the preceding period (light bars). Own profits for the most recently completed period and for the preceding period are displayed similarly, as shown in the right side of the panel. We also streamline sellers' price-posting procedures. Unlike the standard posted offer implementation, where sellers make and confirm both price and quantity choices, sellers here may complete posting decisions simply by typing an entry in the price box and pressing ENTER. The program automatically inputs the maximum number of units that a seller may profitably offer at the selected price (although sellers may override this entry if they like). Finally, to further speed decisions, we remove the standard price confirmation check.
[FIGURE 1 OMITTED]
This near-continuous posted offer mechanism usefully allows for the collection of a very large amount of data in a standard laboratory session. Our debriefing of participants after a pilot session indicated that, at least with some mechanism experience, participants felt comfortable inputting decisions and responding to results in trading periods that lasted only 7 sec, a small fraction of the length of trading periods in many standard posted offer implementations. (7)
B. Experiment Design
Figures 24 illustrate variants of the monopoly pricing problem, the trend demand design, and the swastika design used here.
In the monopoly pricing problem, shown in Figure 2, discrete demand steps make the price-searching problem nontrivial because these demand steps create spikes in the profit polygon. (8) Note that in the right panel of the figure, the monopolist can earn $7.20 by posting a price of $3.20. However, local profit maxima that extract a reasonably large portion of monopoly profits arise at...
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