Do traders learn to select efficient market institutions?

Carlos Alós-Ferrer, Johannes Buckenmaier, Georg Kirchsteiger

Research output: Contribution to journalArticlepeer-review

Abstract

When alternative market institutions are available, traders have to decide both where and how much to trade. We conducted an experiment where traders decided first whether to trade in an (efficient) double-auction institution or in a posted-offers one (favoring sellers), and second how much to trade. 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 sellers trade off higher efficiency in a market with dwindling profits for biased-up profits in a market with vanishing customers. Hence, efficiency alone might not be sufficient to guarantee coordination on a single market institution if the surplus distribution 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.

Original languageEnglish (US)
JournalExperimental Economics
DOIs
StateAccepted/In press - 2021

Keywords

  • Constant returns to scale
  • Experiment
  • Market clearing
  • Market selection
  • Posted offer market

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

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