Working Paper: NBER ID: w15420
Authors: John A. List
Abstract: Despite their current prevalence and historical significance, little is known about the economics of open air markets. This paper uses open air markets as a natural laboratory to provide initial insights into the underlying operation of such markets. Using data on thousands of individual transactions gathered from May 2005- August 2008, I report several insights. First, the natural pricing and allocation mechanism in open air markets is capable of approaching full efficiency, even in quite austere conditions. Yet, a second result highlights the fragility of this finding: allowance of explicit seller communication frustrates market efficiency in a broad array of situations. Making use of insights gained from a "mole" in the marketplace, a third set of results revolves around economic questions pertaining to collusive arrangements that are otherwise quite difficult to investigate. Overall, I find data patterns that are consistent with certain theoretical predictions, as the evidence suggests that i) cheating rates increase as the coalition is expanded, ii) sellers cheat less when they have collusive arrangements in several spatially differentiated markets, and iii) sellers cheat more when they are experiencing periods of abnormally high profits. These results follow from a combination of insights gained from building a bridge between the lab and the naturally-occurring environment. By doing so, the study showcases that in developing a deeper understanding of economic science, it is desirable to take advantage of the myriad settings in which economic phenomena present themselves.
Keywords: open air markets; collusion; market efficiency; bargaining
JEL Codes: C9; C91; C92; C93; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of collusive arrangements grows (L12) | cheating rates among sellers increase (D43) |
| cheating rates among sellers increase (D43) | decrease in total market surplus (D41) |
| part of collusive agreements in spatially differentiated markets (D43) | sellers cheat less (D43) |
| periods of abnormally high profits (E32) | increased cheating (K42) |
| natural pricing and allocation mechanisms in open air markets (D40) | full efficiency (H21) |
| limited seller communication (Y70) | full efficiency (H21) |
| explicit seller communication (L14) | market efficiency (G14) |
| communication can lead to collusive behaviors (D70) | disrupt efficient pricing (D49) |