Experimental economics summary paper - Essay Example

Summary of the article: The objectives of this study are to examine the applicability and accuracy of the textbook model as applied to auction markets. The authors of the article hoped that by studying the implications of price control in simple control settings, the results may be applied to more sophisticated markets. The experiment consisted of 12 experimental sessions. The laboratory design of each experiment question consisted of an auction market with four buyers and sellers. Buyers made money by buying from the sellers and reselling to the experimenter, while sellers made money by buying from the experimenter and reselling to the buyers.

Each market involved a series of trading periods in which market participants were free to buy and sell. The institutions being examined are a series of price ceilings and price controls. The study would focus on the following three aspects of market behavior: price levels and market volumes, market responses to institutional modifications, and efficiency. The experiment led to two major results and a conjecture. First market behavior under price controls is more closely approximated by the competitive model than by the focal point model.

Secondly market under price controls exhibit behavioral regularities that are not included in standard analysis. Four of those regularizes are: a) controls at the competitive equilibrium cause market to diverge from the competitive equilibrium; b) removal of nonbinding control induces changes in market prices; c) inefficiencies induced by are greater than those predicted by standard application; d) adjustment of prices when biding controls are removed appeared to be involved an initial discontinuity or jump rather than a continuous movement.

The results of the article can be summarized in that the familiar partial equilibrium model works remarkably well to describe laboratory auction market behavior in the presence of price controls and when price controls are binding. Experimental economics can be used to test the validity of a hypothesis based on an economic theory. In the article Price Controls and the Behavior of Auction Markets: An Experimental Examination the authors simulated an auction market in order to test the effects of price ceilings and price controls in marketplaces (Isaac & Plott).

The auction market was selected because of its simplicity to simulate. The results of the experiment could in theory be applied to more sophisticated marketplaces. One of the main findings of the article was that partial equilibrium model is an economic tool that works very well to describe laboratory auction behavior in the presence of price controls. Another interesting finding was the fact that nonbinding price controls seem to affect the average level of prices. Also price levels and market efficiency can be influenced by removing nonbinding controls.

The crucial features of the institutions which induce the results have not been identified. Diocletion claimed that price ceilings would have no effect in regions that were not binding. Based on the results of the experiment he may be wrong. A discussion question that would be of interest for a classroom discussion based on the article is: Would it be possible for the authors of the article to re-create the experiment utilizing a real world auction application such as EBay? Work Cited Page Isaac,M.

, Plott, C. “Price Controls and the Behavior of Auction Market: An Experimental Examination.” The American Economic Review. 71.3. (1981) : 448-459.