CeDEx 2025-03: Intermediaries and Information Aggregation in Fragmented Markets: Experimental Evidence

Summary

Markets have the ability to aggregate information even under difficult conditions. What is not known is whether fragmented markets can also achieve information aggregation when differently-informed traders do not participate in the same market. We experimentally test this by extending the Arrow-Debreu version of the Plott and Sunder (1988) framework to two separate markets, adding uninformed market intermediaries who can trade in both markets. We find that indeed markets are able to aggregate information, but more experience is necessary when there is less competition among the intermediaries. The rate of convergence does not differ systematically across treatments once traders gain sufficient experience. Convergence arises through intermediaries’ cross-market trading in competitive settings, whereas in less competitive settings it relies more on non-price signals. However, despite price convergence, intermediaries earn profits similar to those of informed traders in competitive markets and higher profits than informed traders in less competitive markets.

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Authors

Lawrence Choo, Todd R. Kaplan and Xiaoyu Zhou

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