A Laboratory Investigation of Networked Markets*
ABSTRACT When contracts are not perfectly enforceable, can interpersonal networks improve market e¢ ciency? We introduce exogenous networks into laboratory markets in which traders can cheat in "Distant" transactions but not in "Local" ones. Traders are anonymous outside their network, but inside it they can build a reputation. We examine network con…gurations that have the potential to completely overcome market failure and achieve competitive equilibrium (CE) e¢ ciency. Our results fall short of that mark, but the networks do signi…cantly reduce cheating and increase e¢ ciency. Moreover, the theoretical upper bounds correctly predict the main qualitative trade patterns across our four network architectures. The networks support increased international trade volume and reduced domestic volume, and divert transactions of the highest value and lowest cost units from domestic markets to international networks.
Full-textDOI: · Available from: Daniel Friedman, May 23, 2014
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ABSTRACT: In this paper we focus on the interaction between exogenous network structure and bargaining behavior in a laboratory experiment. Our main question is how competition and cooperation interact in bargaining environments based on networked versions of the investment game. We focus on 3-node networked markets and vary the network structure to model competition upstream (multiple sellers paired with a monopsonistic buyer) and competition downstream (a monopolistic seller paired with multiple buyers). We describe two kinds of models of trust for such networked environments, absolute and relativized models, and use this structure to generate a general hypothesis about these environments: that information crowds in cooperation on the competitive side of the market. The experimental results support this hypothesis.
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ABSTRACT: This paper focuses on the interaction between network structure, the role of information, and the level of trust and trustworthiness in 3-node networks. We extend the investment game with one Sender and one Receiver to networked versions — one characterized by one Sender and two Receivers ([1s-2r]) and one characterized by two Senders and one Receiver ([2s-1r]) — under two information conditions, full and partial. We develop a comparative model of trust for the networked exchange environments and generate two hypotheses: (1) what counts as a signal of trust depends on investment behavior along the other link in the network and (2) this type of trust can be leveraged under full information, increasing the rate of cooperation on the side of the exchange with multiple traders. The results generally support our hypotheses: trust is comparative and under full information, the [1s-2r] network shows higher trustworthiness and the [2s-1r] network displays higher trust.Games and Economic Behavior 01/2008; 71(2-71):282-303. DOI:10.1016/j.geb.2010.04.003 · 0.83 Impact Factor
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ABSTRACT: We develop a two-market model under three conditions: autarky, frictionless free trade, and free trade with cheating. With cheating, buyers can underpay by π% in cross-market trades and sellers can deliver π% of full value. We solve for competitive equilibrium with cheating and obtain novel testable predictions on price, volume and surplus. We test these in a laboratory experiment using parameters intended to challenge the theory. The results are generally consistent with competitive equilibrium. We find evidence of price unification, market segmentation, a cross-market volume of trade lower under cheating than in frictionless free trade, but a higher overall volume.Journal of Economic Behavior & Organization 10/2009; 72(1-72):240-259. DOI:10.1016/j.jebo.2009.03.015 · 1.01 Impact Factor