#08-10
Trading in Networks: A Normal Form Game Experiment
Douglas Gale and Shachar Kariv, September 2008
Abstract: This paper reports an experimental study of trading networks, in which exchange
is intermediated by traders who form a chain of links between the initial owner of the
assets and ultimate owner of the assets. Traders choose bid and ask prices and trades
are executed by the computer once subjects have submitted their strategies. Networks
are incomplete in the sense that each trader can only exchange assets with a limited
number of other traders. The greater the incompleteness of the network, the more
intermediation is required to transfer the assets between initial and final owners. The
uncertainty of trade in networks constitutes a potentially important market imperfection.
As a result, the inferences subjects must draw in order to make optimal decisions
are quite subtle. Nevertheless, we find that the competitive prices can account for
the pricing behavior observed in the laboratory in variety of networks and trading
protocols. Furthermore, significant differences can be identified in the pricing behavior
of subjects in different networks, and different trading protocols lead to different
dynamics.
Keywords:
JEL classifications: .C91, C92, G10, G19.
