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Do traders learn to select efficient market institutions?


Alos-Ferrer, Carlos; Buckenmaier, Johannes (2020). Do traders learn to select efficient market institutions? Department of Economics Working Paper Series 364, University of Zurich.

Abstract

When alternative market institutions are available, traders have to decide both where and how much to trade. We conducted an experiment where traders could decide to trade either in an (efficient) double-auction institution or in a posted-offers one, which should favor sellers. When sellers face decreasing returns to scale (increasing production costs), fast coordination on the double-auction occurs, with the posted-offers institution becoming inactive. In contrast, under constant returns to scale, both institutions remain active and coordination is slower. The reason is that, in a finite-horizon setting, sellers trade off larger efficiency in a market with dwindling profits for biased-up profits in a market with vanishing customers. Hence, our results indicate that efficiency alone might not be sufficient to guarantee coordination on a single market institution if the distribution of the gains from trade is asymmetric. Trading behavior approaches equilibrium predictions (market clearing) within each institution, but switching behavior across institutions is explained by simple rules of thumb, with buyers chasing low prices and sellers considering both prices and trader ratios.

Abstract

When alternative market institutions are available, traders have to decide both where and how much to trade. We conducted an experiment where traders could decide to trade either in an (efficient) double-auction institution or in a posted-offers one, which should favor sellers. When sellers face decreasing returns to scale (increasing production costs), fast coordination on the double-auction occurs, with the posted-offers institution becoming inactive. In contrast, under constant returns to scale, both institutions remain active and coordination is slower. The reason is that, in a finite-horizon setting, sellers trade off larger efficiency in a market with dwindling profits for biased-up profits in a market with vanishing customers. Hence, our results indicate that efficiency alone might not be sufficient to guarantee coordination on a single market institution if the distribution of the gains from trade is asymmetric. Trading behavior approaches equilibrium predictions (market clearing) within each institution, but switching behavior across institutions is explained by simple rules of thumb, with buyers chasing low prices and sellers considering both prices and trader ratios.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D4, D83, L1
Uncontrolled Keywords:Market selection, market clearing, posted offer market, constant returns to scale, experiment
Language:English
Date:September 2020
Deposited On:25 Sep 2020 12:41
Last Modified:25 Sep 2020 12:41
Series Name:Department of Economics Working Paper Series
Number of Pages:43
ISSN:1664-7041
Additional Information:1664-705X (E)
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://www.econ.uzh.ch/en/research/workingpapers.html?paper-id=1046

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