Market stability: backward bending supply in a laboratory experimental market
This article 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, and (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 on the underlying reasons for demand and supply shapes.
© 2000 Western Economic International. Article first published online: 26 Mar. 2007. A major acknowledgement is given to Ken Andrews and Erik Hiller. As undergraduates in experimental economics courses in the late 1980s they were full partners in the early development of this project. They participated in the development of instructions, the design of parameters and the execution of the experiments. Unfortunately, graduation from Caltech precluded their further participation. The financial support of the National Science Foundation and the support of the Caltech Laboratory for Experimental Economics and Political Science are gratefully acknowledged. Special thanks go to Dan Richardson, John Patty and Chris Anderson, who helped as research assistants.