Price flexibility and market performance in experimental markets

Summary Posted offer and double auction pricing institutions are examples of fixed and flexible pricing institutions, respectively. In laboratory settings, double auction markets dominate posted offer institutions in terms of the amount of potential surplus which traders are able to extract. These results are invariant with respect to the experience of traders or the perishability of the good traded. Performance differences across institutions may be due to information differences. The introduction of a second price-posting in the posted offer institution results in a pricing institution which is closer to the double auction's flexible pricing environment. Laboratory results suggest that under otherwise comparable conditions, this innovation is sufficient to remove the performance differences which have been demonstrated to exist between the posted offer and double auction institutions.We acknowledge the support of the Social Sciences and Humanities Research Council of Canada and the Arts Research Board of McMaster University. We thank Robert Moir and Susan Sabourin for computational work on this project and the fifteen undergraduates who worked as recorders and recruiters. We also thank Charles Plott and seminar participants at the Economic Science Association, Canadian Economics Association, and Waterloo University for the comments received on recent versions of this work.