An Experimental Examination of the Simultaneous Determination of Input Prices and Output Prices

Abstract

[Introduction] This paper involves a test of the competitive equilibrium as a model of the interdependence that exists between input and output markets. The test was motivated by the questions of skeptical students who were just learning the details of the competitive model. It was also motivated as a natural extension of existing results. In essence, the interdependence between input and output markets has been observed in several laboratory studies in which arbitrage could occur in markets separated by space or by time [6, 599-624; 5; 8, 1063-1071; 3, 223-241; 1, 537-567; 2, 955- 981; 7, 106-127; 9, 1-33]. Goods acquired by an arbitrager or by a speculator can be viewed as inputs taken from one market and then when sold by the same agent in a spatially separated or a temporarily separated market, they can be viewed as outputs resulting from a simple production process. Thus, all experiments in which such market activity exists can be viewed as having involved production. However, in all cases studied to date the market interdependence was rather transparent and the production technology was linear. In this study, the problem posed for the multiple markets is not transparent and the technology is nonlinear.

The exposition is developed so that the complexity of the model and the situation can be appreciated by readers who have not attempted to work through the details of the competitive model. The competitive model involves an extraordinary number of definitions and behavioral hypotheses, any of which might be unrealistic. All of them are part of the resulting model and predictions but they are frequently buried in axioms and exist implicitly in notation and defi- nitions. The strategy of this paper is to solve the model showing at each step the definition or behavioral hypothesis that is applied so that all of the theoretical machinery is covered. The pur- pose is to provide data that show that interdependent markets can grapple with a complex problem essentially in the way that the theory suggests. The paper provides no substantial conclusions about the fine aspects of theory. Whether or not markets can always do it or how markets do it is not addressed. Section I describes the experimental setting. Section II develops the model and section III contains the data. 

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