Journal Article The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries Get access Timothy N. Cason Timothy N. Cason Purdue University Address correspondence to Timothy N. Cason, Department of Economics, Krannert School of Management, Purdue University, West Lafayette, IN 47907-1310, or E-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 2, April 2000, Pages 385–416, https://doi.org/10.1093/rfs/13.2.385 Published: 15 June 2015

This paper presents a model in which a durable goods monopolist sells a product to two buyers. Each buyer is privately informed about his own valuation. Thus all players are imperfectly informed about market demand. We study the monopolist’s pricing behavior as players’ uncertainty regarding demand vanishes in the limit. In the limit, players are perfectly informed about the downward‐sloping demand. We show that in all games belonging to a fixed and open neighborhood of the limit game there exists a generically unique equilibrium outcome that exhibits Coasian dynamics and in which play lasts for at most two periods. A laboratory experiment shows that, consistent with our theory, outcomes in the Certain and Uncertain Demand treatments are the same. Median opening prices in both treatments are roughly at the level predicted and considerably below the monopoly price. Consistent with Coasian dynamics, these prices are lower for higher discount factors. Demand withholding, however, leads to more trading periods than predicted.

This paper reports a laboratory experiment that examines price formation in the single call market. The experiment design is intended to enhance the predictive power of the Bayesian Nash equilibrium (BNE) theory for this trading institution. The data support several qualitative implications of the BNE, especially when subjects compete against Nash 'robot' opponents, but subjects' behavior is not as responsive to changes in the pricing rule as the BNE predictions. Offers tend to reveal more of the underlying values and costs than predicted, particularly when subjects are experienced. A simple learning model accounts for several of the deviations from BNE.

A fast-growing theoretical literature on the political economy of reform has provided a sizable collection of models that have deepened our understanding concerning how distributional conflict manifests itself in the political process and can prevent efficiency-enhancing economic reform from taking place (see e.g., Allan Drazen [2000 Ch. 10, 13] for an insightful review). Unfortunately, systematic empirical work that provides direct tests of the validity and significance of the mechanisms articulated in these models has been limited. As Torsten Persson and Guido Tabellini (2000 p. 481) note in their evaluation of the larger political economy literature, “The gap between theory and evidence is a final weakness of the existing literature. . . . [W]hen there is empirical work, its ties to the underlying theory are often loose . . . [and] are not tied well to the extensive form games or theoretical predictions in theoretical work. Ideally, we would like more empirical work ‘derived from theory’ as opposed to ‘informed by theory.’ ” One reason for the lack of such empirical studies is that most of these (often gametheoretic) models explain policy outcomes as a result of strategic interaction of forward-looking agents. Direct tests of these models using field data are subject to the same difficulties that researchers have faced when testing gametheoretic models in other areas such as industrial organization, since qualitative features of the equilibria often depend sensitively on the specific assumptions of the game structure (see Richard Schmalensee, 1988 pp. 675–76; Gilles Saint-Paul, 2000). In addition, the politicaleconomy literature of reform explains policy outcomes using political variables such as the distribution of voters’ preferences and the nature of political institutions (see e.g., Drazen, 2000; Stephan Haggard, 2000). The time variation of these variables is often limited, leading to a classic identification problem and making direct tests of theoretical models difficult (Saint-Paul, 2000). Laboratory studies allow the researcher to manipulate explanatory variables of a theory as treatment variables, so such studies should be helpful in partially overcoming these difficulties and can complement field empirical work on reform. The study of reform also poses new challenges to experimental economists, and a dialogue between political economists and experimental economists can enable both sides to capture gains from trade. This paper aims to illustrate this using an experimental study of the model in the influential paper by Raquel Fernandez and Dani Rodrik (1991).

This study explores the tension between the standard economic theory of preference and nonstandard theories of preference that are motivated by an underlying theory of framing. A simple experiment fails to measure a known preference. The divergence of the measured preference from the known preference reflects a mistake, arising from some subjects’ misconception of the game form. We conclude that choice data should not be granted an unqualified interpretation of preference revelation. Mistakes in choices obscured by a possible error at the foundation of the theory of framing can masquerade as having been produced by nonstandard preferences.