Market Stability: Backward Bending Supply in a Laboratory Experimental Market

Abstract

The paper investigates the stability properties of markets with backward bending supply curves. Parameters are chosen so that the two classic models of price dynamics, the Walrasian model and the Marshallian model, give opposite predictions. The results are: (1) market instability can be observed; (2) in the backward bending case stability is captured by the Walrasian model and the Marshallian model of dynamics is rejected. Previous experiments have demonstrated that the Marshallian model works in the forward falling case. Thus, which theory of dynamics is appropriate for a market depends upon the underlying reasons for demand and supply shapes.