Working Paper: CEPR ID: DP593
Authors: Jeremy Bulow; Paul Klemperer
Abstract: Most markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide whether to buy now or later, rather than only now or never, their current `willingness to pay' is much more sensitive to price than is the demand curve. In consequence, markets will be extremely sensitive to new information, leading to frenzies where demand feeds upon itself, and crashes where price drops discontinuously. Although no buyer's independent reservation value reveals much about overall demand, a small increase in one such value can cause a large increase or decrease in average price.
Keywords: market clearing; frenzies; crashes; auctions
JEL Codes: 044; G10; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Initial transaction (Y20) | Increased demand (J23) |
| Increased buying activity (G19) | Market corrections (G18) |
| Buyers' expectations (D84) | Market prices (P22) |
| Small shifts in buyer expectations (D16) | Large changes in market prices (E30) |