Randomized double auctions: gains from trade,trader roles,and price discovery

Experimental double-auction commodity markets are known to exhibit robust convergence to competitive equilibria under stable or cyclical supply and demand conditions, but little is known about their performance in truly random environments. We provide a comprehensive study of double auctions in a stochastic setting where the equilibrium prices, trading volumes and gains from trade are highly variable across periods, and with commodity traders who may buy or sell their goods depending on market conditions and their individual outcomes. We find that performance in this stochastic environment is sensitive to underlying market conditions. Efficiency is higher and convergence to the competitive equilibrium stronger when the potential gains from trade are high and when the equilibrium spans a wide range of quantities, implying a large number of marginal trades. Speculative re-trading is prevalent, especially among those who have little to gain under equilibrium pricing. Those with the largest expected gains typically earn far less than predicted, while those with little or no predicted earnings gain modestly from speculation, leading to some redistribution of gains from high to low expected earners. Excessive trading volumes are associated with negative efficiencies in markets with low gains from trade, but not in the high-gains markets, where zero-sum trading and re-trading appear to enforce efficiency and near-equilibrium pricing. Buyers earn more relative to their competitive equilibrium benchmark than sellers do. Introducing trader specialization leads to fewer trading errors and higher market efficiency, but it does not eliminate zero-sum trading and re-trading.

     

Costly Search, Capacity Constraints, and Bertrand Equilibrium Price Dispersion

This article analyzes the impact of transaction (search) costs and capacity constraints in an almost competitive market with homogeneous firms that compete on price. We characterize conditions under which Nash equilibria with price dispersion exist; in equilibrium, firms play pure strategies in prices and consumers adopt a symmetric mixed search strategy. Price dispersion is possible even though consumers all have the same search cost and valuation for the item and prices charged by all firms are common knowledge.     

Prices, Delay, and the Dynamics of Trade

We characterize the dynamics of trading patterns and market composition when trade is bilateral, finding a trading partner is costly, prices are determined by bargaining, and preferences are private information. We show that equilibrium is inefficient and exhibits delay as sellers price discriminate between buyers with different values. As frictions vanish, transaction prices are asymptotically competitive and the welfare loss of inefficient trading approaches zero, even though the trading patterns continue to be inefficient and delay persists. Journal of Economic Literature Classification Numbers: D40, D50.     

The influence of black markets on a queue-rationed centrally planned economy

In centrally planned economies in which prices are fixed, and the rationing mechanism is waiting line queues, we show that an equilibrium of waiting times exists. We then introduce a “black market” in which individuals can trade commodities that they have acquired through the official economy. An equilibrium of black market prices and waiting times is shown to exist; further, the economy with a black market is “queue-efficient.”. However, the introduction of black markets is not necessarily a Pareto improvement over an economy without black markets (even when we allow winners to compensate losers).     

Water quality trading with asymmetric information,uncertainty and transaction costs: A stochastic agent-based simulation

We examine the efficiency of emissions trading in bilateral and clearinghouse markets with heterogeneous, boundedly rational agents making decisions under imperfect and asymmetric information, and transaction costs. Results are derived using a stochastic agent-based simulation model of agents’ decision-making and interactions. Trading rules, market structures, and agent information structures are selected to represent emerging water quality trading programs. The analysis is designed to provide a strong test of the efficiency of trading occurring through the two market structures. The Differential Evolution algorithm is used to search for market trade strategies that perform well under multiple states of the world. Our findings suggest that trading under both bilateral and clearinghouse markets yields cost savings relatively to no trading. The clearinghouse is found to be more efficient than bilateral negotiations in coordinating point–nonpoint trading under uncertainty and transaction costs. However, the market under both structures is unlikely to achieve or even approximate least-cost pollution control allocations. Expectations of gains from water quality trading should, therefore, be tempered.     

AN EMPIRICAL STATIONARY EQUILIBRIUM SEARCH MODEL OF THE HOUSING MARKET*

This article specifies and estimates a computationally tractable stationary equilibrium model of the housing market. The model is rich and incorporates many of its unique features: buyers’ and sellers’ simultaneous search behavior, heterogeneity in their motivation to trade, transaction costs, a trading mechanism with posting prices and bargaining, and the availability of an exogenous advertising technology that induces endogenous matching. Estimation uses Maximum Likelihood methods and Multiple Listing Services data. The estimated model is used to simulate housing market outcomes when (a) the amount of information displayed on housing listings increases and (b) real estate agent’s commission rates change.     

Endogenous market power

In this paper we develop a framework to study markets with heterogeneous atomic traders. The competitive model is augmented as we provide traders with correct beliefs about their price impacts to define equilibrium with endogenously determined market power and show that such equilibrium exists in economies with smooth utility and cost functions and is generically determinate. Traders? price impacts depend positively on the convexity of preferences or cost functions of the trading partners and are subject to mutual reinforcement. Compared to the competitive model, the volume of trade is reduced, and hence is Pareto inefficient. The price effects of non-competitive trading depend on the convexity of marginal utility or cost function.     

Transaction costs and informational cascades in financial markets

We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We implement a financial market with sequential trading and transaction costs in the laboratory. According to theory, eventually all traders neglect their private information and abstain from trading (i.e., a no-trade informational cascade occurs). We find that, in the experiment, informational no-trade cascades occur when theory predicts they should (i.e., when the trade imbalance is sufficiently high). At the same time, the proportion of subjects irrationally trading against their private information is smaller than in a financial market without transaction costs. As a result, the overall efficiency of the market is not significantly affected by the presence of transaction costs.     

A NEW THEORY OF DEMAND AND SUPPLY AND EMERGENCE OF INTERNATIONAL TRADE FROM DOMESTIC TRADE

Abstract. In the paper a fixed learning cost is introduced into a framework with consumer-producers and transaction costs. The fixed learning cost yields a rate of return on the investment in individual specific learning and training which is increasing in its rate of utilization. Division of labor can avoid duplicated learning costs and generate economies of specialized learning. The tradeoff between economies of specialization and transaction costs can be used to explain concurrent increases in the extent of the market, aggregate demand, productivity, trade dependence, the degree of market integration, the degree of production concentration, diversity of economic structure, variety of different professions, each person's level of specialization, and the extent of endogenous comparative advantage and the emergence of international trade from domestic trade. This model explains demand and supply as two sides of the level of division of labor which is determined by a transaction cost coefficient. Hence, the demand law may not hold even for normal goods owing to complicated interdependencies between the level of specialization and demand and between the level of specialization and prices of traded goods. The extended version of this model with the CES function is used to endogenize variety of consumption in addition to the endogenization of individuals'level of specialization.     

Implicit Mercantilism,Oligopoly, and Trade*

The authors propose a new model of trade between developing and advanced economies to capture the effects of important asymmetries in the organizations of their industries. This model demonstrates how the industrial structure of a developing economy can evolve to produce what the authors call “implicit mercantilism.” Free entry plus domestic oligopoly in a developing economy, when combined with competitive behavior in developed countries, generates several distinct stages of mercantilism hitherto unrecognized in the literature. Each stage has its own pattern of interaction with a competitive trading world. As the production costs and techniques of the mercantile society converge to world standards, its citizens will first lose from this progress, only later to gain. Both effects are due to certain relationships between home prices and world prices, newly identified in this paper. The analysis is particularly relevant to the structure of Asian economies, and to policy debates about their reform.     

Trade prices and supply in the UK economy

Current account imbalances are a major source of instability in the world monetary and trading system. Measures to correct these imbalances have largely involved adjustments to exchange rates. In the international trade literature, when the current account is in deficit, the Marshall-Lerner condition is sufficient for a successful devaluation. However, this partial equilibrium condition — apart from being based on the assumption that supply elasticities are infinite — abstracts from how the domestic economy responds to the change in relative prices. In this paper we develop a model of price and output determination in an open economy with imperpectly competitive markets, and draw a distinction between goods which are exported and those which are supplied to the domestic market. This means that we have to determine jointly both export prices and the domestic price of house sales. We show that as long as there is no money illusion in the labour market a fall in the nominal exchange rate raises domestic and export prices proportionally and leaves trade volumes unaffected. However, shifts in domestic absorption relative to overseas demand — by changing relative prices — cause shifts in the relative supply of exports and domestically sold goods and affect the trade balance. Thus fiscal and monetary measures directed towards reducing domestic absorption are more likely to be successful in correcting current account imbalances than exchange rate depreciation.     

PERIODIC,COMPLETE‐PARTICIPATION TRADE IN THE LAGOS‐ROCHETEAU MODEL

This paper contributes to a recent policy discussion regarding the costs and benefits of setting up a centralized electronic trading platform to replace over‐the‐counter (OTC) markets. We modify the Lagos and Rocheteau (2009, henceforth LR) asset trading model by replacing their investor‐dealer random matching and bilateral trade with a centralized competitive market that opens periodically. This arrangement preserves the main tension and trade‐off in LR. We then analyse and quantify when to introduce a centralized market and how frequently it should open in order to make it as efficiently as the decentralized OTC market in LR.     

The exchange rate pass-through into import prices: the case of Japanese meat imports

Japan is a traditional net importer of food products in general and meat products in particular. Japanese meat imports come from a few countries thus making Japan potentially very sensitive to the swings in one or a few bilateral exchange rates. One of the key contributions of this article is the use of commodity (meats in this case) imports weighted exchange rates in the analysis. The standard practice in previous international agricultural trade studies related to either exchange rate pass-through or pricing to market was to use the aggregate trade weighted exchange rates usually provided by the Central Bank authorities or sources. Beef and poultry import prices indicate partial exchange rate pass-through while import prices of pork indicate zero exchange rate pass-through, primarily due to gate price policy system applied to pork imports. In terms of competitiveness, these results suggest relatively more competitive markets among poultry importing firms, somewhat competitive markets among beef importing firms, while competitiveness of pork importing firms could not be assessed due to existing import policies.     

Core and equilibrium in incomplete markets

Conclusions The classical foundation of general equilibrium analysis by the cooperative concept of the core has been extended to an economy with incomplete trading possibilities. This has been accomplished by restricting the exchange possibilities of coalitions of traders in accordance with the available market structure. However, compared with the classical result, the present foundation of rational expectations equilibria may appear much weaker. The reason is that in reality consumers may sign contracts which are more complex than the existing market structure. Therefore, it may happen that prices cannot decentralize all cooperative transactions by markets, in spite of perfect competition. With an incomplete set of markets, therefore, a cooperative exchange of commodities by individual contracts may coexist with trading in non-cooperative, competitive markets.I wish to thank Martin Hellwig for helpful comments and suggestions. Of course, I remain responsible for all shortcomings of the paper.     

Concurrent trading in two experimental markets with demand interdependence

Summary. We report results from fifteen computerized double auctions with concurrent trading of two commodities. In contrast to prior experimental markets, buyers' demands are induced via CES earnings functions defined over the two traded goods, with a fiat money expenditure constraint. Sellers receive independent marginal cost arrays for each commodity. Parameters for buyers' earnings functions and sellers' costs are set to yield a stable, competitive equilibrium. In spite of the complexity introduced by the demand interdependence, the competitive model is a good predictor of market outcomes, although prices tend to be above (below) the competitive prediction in the low-price (high-price) market.     

Ripple effect in house prices and trading volume in the UK housing market: New viewpoint and evidence

This study adopts the data of house prices and trading volume in the overall UK housing market and in the housing markets in the 10 major regions in the UK to estimate the ripple effect in the trading activities in the housing markets. First, this study details why the ripple effect occurs in the housing market price and volume using static and cobweb dynamic models. The results of the panel-based unit root tests indicate that the relative price and volume ratios show constancy, signifying that long-run equilibrium relationships exist between the regional and national housing markets in the UK. The frequency of the transaction volume convergence behavior is higher than that of the overall house prices.     

Carbon Abatement and International Spillovers

Carbon abatement policies in large open economies affect both the allocation of domestic resources and international market prices. A change in international prices implies an indirect secondary burden or benefit for all trading countries. Based on simulations with a large-scale computable general equilibrium model of global trade and energy use, we show that international spillovers have important welfare implications for carbon abatement policies designed to meet exogenous emission reduction targets. We present a decomposition of the total welfare effect of carbon abatement policies into a primary domestic market effect (at constant international prices) and a secondary international spillover impact as a result of changes in international prices. This decomposition reveals the extent to which domestic abatement costs are increased or decreased as a result of the impact of carbon abatement on international prices.     

Does money impede convergence?

Inspired by Clower’s conjecture that the necessity of trading through money in monetised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemployment, we experimentally investigate behaviour in markets where trading has to be done through money. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in markets without money, where money cannot intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of non-monetised/monetised trading with double auction/clearing house. We find that: convergence is faster under non-monetised trading, implying that the necessity of using money to facilitate trade hinders convergence; that monetised trading is noisier than non-monetised trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. As far as efficiency is concerned, monetised trading lowers both informational and allocational efficiency, and while the double auction outperforms the clearing house in terms of allocational efficiency, the clearing house is marginally better than the double auction in terms of informational efficiency when trade is through money. Crucially we confirm the conjecture that inspired these experiments: that the necessity to use money in trading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.     

Russian commodity exchanges: A case study of organized markets in the transition process, 1990-96

Few developments are more significant in transitional economics than the development of organized commodity and financial markets. Working from a transaction costs framework, this paper analyses a set of these markets, the Russian commodity exchanges, and their attempts to order trade in commodities in the period 1990-96. These exchanges have incurred high transaction costs both in defining the property rights involved in trading and in overcoming the problems of agent search and 'immediacy'. Parallels between Russian commodity exchanges and other organized markets in Eastern Europe are drawn and remedies for the problems encountered are suggested.     

Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity

We introduce search unemployment into Melitz's trade model. Firms' monopoly power on product markets leads to strategic wage bargaining. Solving for the symmetric equilibrium we show that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves average productivity. We show that this condition is likely to be met by a reduction in variable trade costs or by entry of new trading countries. Calibrating the model shows that the long-run impact of trade openness on the rate of unemployment is negative and quantitatively significant.