Experiments in networked markets
Abstract: The aim of the paper is to explore the effects of market opacity and trade frictions, on market efficiency and social welfare, in exchanges organized by decentralized trade and intermediation. Networks are a natural tool to represent the trading relationships among market participants in decentralized markets. By constraining matching on exogenously predetermined networks, and without altering the price formation mechanism, which is based on the bilateral trading limit order book technology, we interpolate between, and compare, highly decentralized and fully connected double auctions markets. Via laboratory experiments with human subjects we investigate how the structure of the trading network affects the market reaction to public information, the way asymmetric private information is aggregated into prices, the manner in which the price negotiated on a particular trade reflects the relative degree of connectedness of the buyer and seller, and the extent to which location advantages create heterogeneities in gains from trading among traders.
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