Commodity durability, trader specialization, and market performance

Abstract

The original double auction studies of supply and demand markets established their strong efficiency and equilibrium convergence behavior using economically unsophisticated and untrained subjects. The results were unexpected because all individual costs and values were private and dependent entirely on the market trading process to aggregate the dispersed information into socially desirable outcomes. The exchange environment, however, corresponded to that of perishable, and not re-traded goods in which participants were specialized as buyers or sellers. We report experiments in repeated single-period markets where tradability, and buyer-seller role specialization, is varied by imposing or relaxing a restriction on re-trade within each period. In re-trade markets scope is given to speculative motives unavailable where goods perish on purchase. We observe greatly increased trade volume and decreased efficiency but subject experience increases efficiency. Observed speculation slows convergence by impeding the process whereby individuals learn from the market whether their private circumstances lead them to specialize as buyers or sellers.durable goods | specialization of trade | speculation and liquidity E quilibrium between supply and demand (S&D) based on subjective marginal unit value was first articulated by Jevons (1) in 1862.* The model is here characterized by buyers whose consumption values vary for a commodity and sellers who can supply the commodity at varying costs. When a buyer buys a unit, both buyer and seller earn a private surplus. There exists a price at which quantity demanded equals quantity supplied defined as the equilibrium price and quantity. At this price, the total social surplus is maximized, and full efficiency is achieved. Jevons (3) believed that this theoretical equilibrium would not be achievable unless all participants had "perfect knowledge of the conditions of supply and demand, and the consequent ratio of exchange" or price (3).The theory was tested in the laboratory one century later, yielding the unanticipated result of rapid convergence to efficient outcomes. Naïve subjects, learning through experience and informed only of their own marginal value (cost) information, have no prevision of the S&D equilibrium, but they discover it by sequential adjustment of their trades (4). Until experimental research established that the perfect knowledge conditions were neither necessary nor sufficient for empirical S&D equilibrium to be closely approximated by untrained subjects, Jevons' belief was widely accepted in economics [proposition 6 in the work by Smith (5)].These experiments share characteristics common to nondurable consumer goods and services in the national economy (e.g., hamburgers and haircuts): buyers and sellers who are specialized in their roles do not retrade, have premarket knowledge of their role, and values are realized immediately on purchase or sale. As we move from services and other items that perish with their purchase to goods durable enough to be retraded, the pa...

Adam Smith: From Propriety andSentimentsto Property andWealth

“…These insights led to an experimental re-appraisal of the consequences of items being perishable with buyers and sellers being role specialized versus items being within-period durable (re-tradable) with buyer and seller roles depending on price relative to their individual unit values in final consumption. Even the very simple case of being re-tradable only within the production -consumption period caused delay in equilibrium discovery (seeDickhaut et al, 2012). 284 Downloaded by [Wayne State University] at 18:44 21 March 2015 FROM PROPRIETY AND SENTIMENTS TO PROPERTY AND WEALTH…”

Bubbles, Crashes, and Endogenous Uncertainty in Linked Asset and Product Markets*

“…Surprisingly we also observe some instances in which, even with extensive market experience, bubbles persist until the end of the experiment. Following Dickhaut et al (2012), we calculate the percentage of speculative trades and find that roughly one-third of all trades in our markets can be considered speculative. 12 This may partially explain the presence of sustained bubbles, and our evidence on Walrasian adjustment provides additional support for this explanation.…”

“…Following Dickhaut et al. () we consider a trade made by a given individual speculative if he/she follows a purchase (sale) immediately by an attempt to sell (buy) at a higher (lower) price than the previous transaction. Our estimate of speculative trades is lower than that reported in their paper, though there are other substantial differences between these environments.…”

Retrading, production, and asset market performance

“…Motivated by the glaring contrast in these two kinds of markets, Dickhaut et al (13) reformulated the traditional supply and demand environment by explicitly modeling two goods: "cash" as a means of payment and a "commodity" that had a heterogeneous end-of-period "dividend" consumption yield value. This formulation exactly parallels the asset trading environment, except that cash and commodity endowments have only a oneperiod life and dividends are not common.…”

“…In the supply and demand experiments, however, trades were for immediate consumption, as with hamburgers and haircuts; as noted in ref. 13, items could not be retraded and individuals knew in advance that they were specialized as buyers or sellers and could not switch roles depending on price as in asset markets.…”