The Competitive Market Paradox

Steven Gjerstad ()

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: The competitive market model is a paradoxical. In perfect competition, agents cannot influence price: they only select an output quantity. Such passive behavior doesn t conform to the intuitive notion of competition. This paper describes an experiment which demonstrates that near or even at a competitive equilibrium price, competition is undiminished. A substantial difference between the performance of sellers and buyers frequently results from this vigorous competition, even with low price variability and approximate efficiency. In double auction experiment sessions conducted with both automated and human agents, exogenous variation of the pace of asks and bids of automated agents demonstrates that the performance difference between sellers and buyers results primarily from a difference between the pace of asks and bids. If the buyers pace is slower than sellers pace, buyers make price concessions less frequently than sellers so that prices move below the equilibrium price. Then more buyers become active and fewer sellers remain active. Prices stabilize when changes to the numbers of active buyers and sellers offset the superior bargaining capability of one side or the other. In competitive equilibrium, to a first approximation agents are price takers, but that doesn t preclude vigorous competition: competitive behavior moves to the dimension of bargaining pace.

Keywords: Bargaining; bounded rationality; competitive equilibrium; double auction; experimental economics (search for similar items in EconPapers)
JEL-codes: C78 C92 D41 D44 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2006-02
New Economics Papers: this item is included in nep-com, nep-exp, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The competitive market paradox (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1180

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