Experimental Economics Seminar - Tim Cason (Purdue University)

Title: A Laboratory Investigation of Price Dispersion and Cycles
by Timothy N. Cason, Daniel Friedman and Ed Hopkins.

Abstract: We report a continuous time laboratory experiment studying the classic Burdett and Judd (1983) model, which features a unique Nash equilibrium (NE) that has dispersed prices. Adaptive dynamics predict that the NE is stable for one parameter set we use, and unstable for another parameter set. We find that time average dispersions are close to the NE distribution for the stable parameter set, but skew towards prices higher than NE for the unstable parameter set. We offer an empirical defnition of price cycles in terms of changes over time in robust measures of central tendency (median) and dispersion (interquartile range). By that definition, the data exhibit persistent cycles in both treatments, with larger cycle amplitudes for the unstable parameters.