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Market Dynamics in Edgeworth Exchange

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  • Steven Gjerstad

    (University of Arizona)

Abstract

Edgeworth exchange is the fundamental general equilibrium model, yet equilibrium predications and theories of price adjustment for this model remain untested. This paper reports an experimental test of Edgeworth exchange which demonstrates that prices and allocations converge sharply to the competitive equilibrium. Price convergence is evaluated with the tatonnement model, interpreted as a disequilibrium model of across- period price adjustment. Subsequently, the extent of within-period adjustment is compared to that of across-period adjustment. Since most observed price adjustment occurs within trading periods, price adjustment data is evaluated with two disequilibrium models of within- period trades. These models are the Geometric Mean model, which is formulated in this paper, and the Hahn process (Hahn and Negishi [1962]). Price dynamics from experiment sessions fit the Geometric Mean model better than the Hahn process, and in addition, the Geometric Mean model provides direction for development of an Edgeworth exchange bargaining model.

Suggested Citation

  • Steven Gjerstad, 2004. "Market Dynamics in Edgeworth Exchange," Microeconomics 0401006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:0401006
    Note: Type of Document - pdf; prepared on WinXP; pages: 39; figures: 13
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0401/0401006.pdf
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    References listed on IDEAS

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    1. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
    2. Gjerstad, Steven & Dickhaut, John, 1998. "Price Formation in Double Auctions," Games and Economic Behavior, Elsevier, vol. 22(1), pages 1-29, January.
    3. Cox, James C, 1997. "On Testing the Utility Hypothesis," Economic Journal, Royal Economic Society, vol. 107(443), pages 1054-1078, July.
    4. Herbert E. Scarf, 1959. "Some Examples of Global Instability of the Competitive Equilibrium," Cowles Foundation Discussion Papers 79, Cowles Foundation for Research in Economics, Yale University.
    5. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-279, May.
    6. Steven Gjerstad, 2003. "The Impact of Pace in Double Auction Bargaining," Levine's Bibliography 666156000000000192, UCLA Department of Economics.
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    Cited by:

    1. Sean Crockett, 2008. "Learning competitive equilibrium in laboratory exchange economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(1), pages 157-180, January.

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    More about this item

    Keywords

    Competitive equilibrium; disequilibrium dynamics; double auction; Edgeworth exchange; experimental economics; exchange economy; Hahn process; market dynamics;
    All these keywords.

    JEL classification:

    • 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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