An experimental investigation of price dispersion and cycles

Timothy N. Cason , Daniel Friedman, Ed Hopkins

Research output: Contribution to journalArticlepeer-review

Abstract

We report a continuous time experiment studying the classic Burdett and Judd (1983) model, whose unique Nash equilibrium (NE) features dispersed prices. Adaptive dynamics predict that the NE is stable for one parameter set we use, and unstable for another parameter set. The empirical price distribution turns out to be close to the NE distribution for the stable parameter set overall, but for the unstable parameter set the empirical distribution skews towards higher prices in its NE support interval. We offer an empirical definition of price cycles in terms of changes over time in robust measures of central tendency (median) and dispersion (interquartile range). By that definition, the data exhibit persistent cycles in both treatments, but with larger cycles for the unstable parameters. Results are roughly similar for professional and student sellers and for limited information treatments.
Original languageEnglish
Pages (from-to)1-59
Number of pages60
JournalJournal of Political Economy
VolumeN/A
Early online date2 Nov 2020
DOIs
Publication statusE-pub ahead of print - 2 Nov 2020

Keywords

  • price dispersion
  • laboratory experiment
  • cycles
  • stability of equilibrium

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