336 O.R. Phillips et al. J. of Economic Behavior Org. 44 2001 333–345
highest valued unit, and so on. Likewise, each seller in a trading cycle was allowed to sell, one at a time, up to eight units. Units were produced and sold in a specified order;
with the first unit produced sold being the lowest cost unit, the second unit produced sold the second lowest cost unit, and so on. The individual demand schedule is given by
p = 135 − 10q
d
and the supply schedule has the form p = 25 + 10q
s
, where q
d
and q
s
may be the split between the PTO and PTS markets in the linked design. Competitive price theory predicts an equilibrium price of 80 tokens and market sales of 20–24 unitsperiod.
For a buyer, earnings on each unit purchased equaled the redemption value of the particular unit less the price paid to the seller. For a seller, earnings on each unit sold equaled the price
received by the seller less the production cost of the particular unit. Earnings accumulated at the end of each trading period and over the sequence of trading cycles, were displayed to
each participant on their computer screen. At the conclusion of each session, participants were paid the cash equivalent of these earnings. Each participant was given an initial token
balance of 700 7.00. Although a nonsalient reward, PTS sellers could lose money on unsold units, or they could make unprofitable sales in order to avoid losing the entire sunk
cost of unsold units; the beginning endowment was set large enough to make bankruptcy a remote possibility.
Bids and asks were submitted by typing into the computer the numerical value. A bid or ask price was displayed to the entire market on each individual’s computer screen, but
the identity of the subject making the bid or ask was not revealed. Individuals could make a trade by using one of two methods. First, the buyer seller could submit a bid ask
which equaled the currently displayed “best” ask bid. The match was instantly made by the computer. Second, the individual could simply strike the “A” key on their keyboard,
in which case a bid ask equaling the current best ask bid was automatically submitted. On the computer screen of the two individuals making the trade, the unit number and trade
price were recorded. The best bid and ask displayed on everyone’s screen were cleared and individuals were allowed to renew bidding and asking.
3. Description of data
For purposes of describing and summarizing the data we combine observations from three PTS only sessions, the observations from three PTO only sessions, and then the data
from four linked OS sessions. Generally the data will be presented as three time series, but we will also examine separately the behavior in the PTO and PTS markets for the linked
design.
Fig. 2 is an average of the prices at which trades are made. After period three the PTS only auction prices are higher than prices in either the PTO only or linked market institutions.
It appears average prices in the PTO only and linked sessions are near the competitive equilibrium level, while prices seem to be higher in the PTS only sessions, on the order of
5–6 tokens higher than the other two market institution designs.
Fig. 3 isolates the average PTO price and the average PTS price from the linked market institution. The average PTS price for the first 7–8 periods is lower than average PTO price,
but then both price series move toward an average of about 80 tokens. It must be the case that seller earnings are relatively smaller in the linked PTS market, because costs are higher
O.R. Phillips et al. J. of Economic Behavior Org. 44 2001 333–345 337
Fig. 2. Average trading price in PTS, PTO, and linked markets.
Fig. 3. Average trading price in PTS and PTO linked market.
338 O.R. Phillips et al. J. of Economic Behavior Org. 44 2001 333–345
Fig. 4. Ratio of average quantity traded in linked PTS markets to total quantity traded.
on the marginal units sold. The pattern of PTO and PTS prices in the linked design contrasts with prices in the PTS only and PTO only designs. In the linked sessions it is PTS prices
that are relatively low. Just the reverse was observed in comparing the PTS only and PTO only price series in Fig. 2; without the link, PTS average trade prices are relatively high.
Fig. 3 shows that over the trading cycles, adjustments are being made in the linked institution to move prices toward the predicted competitive equilibrium. The relatively
higher prices in the PTO market at the beginning of the session suggest that more units should be offered in the PTO auction markets andor buyers should make relatively more of
their purchases in the PTS market. Fig. 4 shows that over time most of the trading activity moves toward the PTO auction. About half way through the linked sessions, PTS sales hold
steady at about 10–15 percent of the total linked transactions. Our data show that the total number of linked transactions is near the competitive prediction, and are stable at about 21
units over the 15 trading cycles. PTO only auctions approach this level from below, and after period three the trading pattern becomes almost identical to the linked auction quantities.
PTS only markets, in contrast, are always lower and seem to stabilize at an average of about 19 units.
Traders endogenously choose the PTO market as the primary institution through which to conduct business. As we suggested earlier, sellers have an incentive to operate in the
PTO market to avoid inventory costs. This may not be obvious to laboratory sellers at the start of a session, because PTO prices in the linked OS design are relatively high, but as
subjects gain experience sellers move toward the PTO market. If buyers are certain of their
O.R. Phillips et al. J. of Economic Behavior Org. 44 2001 333–345 339
Fig. 5. Average buyer earnings in PTS, PTO and linked markets.
redemption value, they are not necessarily indifferent about making purchases in a PTS or PTO setting. The PTS market presents buyers with an inelastic supply of the good, once
production is decided in a trading cycle. These fixed quantities can be highly variable as Fig. 4 shows. As they fall, trading prices rise, and the PTS market becomes less attractive
to buyers. Consequently, trading activity is led by the incentive of buyers and sellers to primarily operate in a PTO market.
Some interesting comparisons can be made by looking at the earnings of buyers and sellers in the three market environments. Fig. 5 shows that buyers do far better in the linked
institutional structure than if there is only a PTS auction. Earnings for buyers in the linked markets are about 60 percent higher than those in the PTS only market. We note that buyer
surplus levels begin at about the same level, but the trend upward in the linked design leaves little question about which trading environment buyers would prefer, as compared to the
PTS only design.
Fig. 6 illustrates average total earnings for the sellers. Over time, these agents do best in the strictly PTS trading environment. After period four, PTS only sellers always earn
more than sellers in a PTO only environment. The linked earnings begin relatively high, but trend down a bit and are exceeded by PTS only earnings midway through the session. Total
surplus in the linked auctions is always very near 100 percent of that possible. It is a bit less, 98 percent or so for the PTO only sessions. The PTS only sessions begin at a relatively
low surplus of about 65 percent and reach a maximum of about 95 percent.
340 O.R. Phillips et al. J. of Economic Behavior Org. 44 2001 333–345
Fig. 6. Average seller earnings in PTS, PTO and linked markets.
4. Hypotheses and testing
