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Price Dynamics in an Exchange Economy

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  • Steven Gjerstad

Abstract

The pure exchange model is the foundation of the neoclassical theory of value, yet equilibrium predictions and models of price adjustment for this model remained untested prior to the experiment reported in this paper. With the exchange economy replicated several times, prices and allocations converge sharply to the competitive equilibrium in continuous double auction (CDA) trading. Convergence is evaluated by comparing the extent of price adjustment within each market replication (or trading period) to the extent of adjustment across trading periods: most observed price adjustment occurs within trading periods, so price adjustment data are evaluated with the Hahn process model (Hahn and Negishi [1962]), which is a disequilibrium model of within-period trades. Estimation demonstrates that the model is consistent with observed price paths within each period of the exchange economy. The model is augmented with an additional assumption based on observations from this experiment that the initial trade price in period t+1 is randomly drawn from the interval between the minimum and maximum trade prices in period t. The estimated within-period adjustment rule, combined with this across-period adjustment rule, generates price paths similar to data from an experiment session.

Suggested Citation

  • Steven Gjerstad, 2007. "Price Dynamics in an Exchange Economy," Purdue University Economics Working Papers 1205, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1205
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    File URL: https://business.purdue.edu/research/Working-papers-series/2007/1205.pdf
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    Cited by:

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    2. Sean Crockett & Vernon L. Smith & Bart J. Wilson, 2009. "Exchange and Specialisation as a Discovery Process," Economic Journal, Royal Economic Society, vol. 119(539), pages 1162-1188, July.
    3. Yuval Rabani & Leonard J. Schulman, 2016. "The Invisible Hand of Laplace: the Role of Market Structure in Price Convergence and Oscillation," Papers 1602.07628, arXiv.org.
    4. Smith, Vernon L., 2010. "Theory and experiment: What are the questions?," Journal of Economic Behavior & Organization, Elsevier, vol. 73(1), pages 3-15, January.
    5. Caginalp, Carey & Caginalp, Gunduz, 2020. "Derivation of non-classical stochastic price dynamics equations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 560(C).
    6. Carey Caginalp & Gunduz Caginalp, 2019. "Derivation of non-classical stochastic price dynamics equations," Papers 1908.01103, arXiv.org, revised Aug 2020.
    7. Eric Smith & Duncan Foley & Benjamin Good, 2013. "Unhedgeable shocks and statistical economic equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 187-235, January.
    8. Gunduz Caginalp, 2020. "Fat tails arise endogenously in asset prices from supply/demand, with or without jump processes," Papers 2011.08275, arXiv.org, revised Mar 2021.
    9. Foley, Duncan K., 2010. "What's wrong with the fundamental existence and welfare theorems?," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 115-131, August.
    10. Sean Crockett & Daniel Friedman & Ryan Oprea, 2021. "Naturally Occurring Preferences And General Equilibrium: A Laboratory Study," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 831-859, May.
    11. Sean Crockett & Ryan Oprea & Charles Plott, 2011. "Extreme Walrasian Dynamics: The Gale Example in the Lab," American Economic Review, American Economic Association, vol. 101(7), pages 3196-3220, December.
    12. Crockett, Sean & Friedman, Daniel & Oprea, Ryan, 2017. "Aggregation and convergence in experimental general equilibrium economies constructed from naturally occurring preferences," Discussion Papers, Research Professorship Market Design: Theory and Pragmatics SP II 2017-501, WZB Berlin Social Science Center.
    13. Rabani, Yuval & Schulman, Leonard J., 2021. "The invisible hand of Laplace: The role of market structure in price convergence and oscillation," Journal of Mathematical Economics, Elsevier, vol. 95(C).

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    More about this item

    Keywords

    Competitive equilibrium; disequilibrium dynamics; continuous double auction; experimental economics; exchange economy; Hahn process; neoclassical theory of value; tatonnement; unit root tests;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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