Markets with Posted Prices: Recent Results from the Laboratory

The general perception that laboratory markets yield efficient competitive outcomes seems to contradict the emphasis on market imperfections that pervades much of the theoretical work in industrial organization. This apparent contradiction is resolved by considering the effects of trading institutions: Competitive outcomes are indeed typical in laboratory markets where trading follows the "double auction" rules similar to those used in many centralized financial exchanges. But most markets of interest to industrial organization economists have a very different institutional structure; sellers post prices, and buyers must either make a purchase on the terms proposed by the seller, or engage in costly search and negotiation to obtain discounts. Unlike more competitive double auctions, the performance of markets with posted prices can be seriously impeded by the presence of market power, price-fixing conspiracies, and cyclical demand shocks. This paper reviews our research on performance in posted-price markets with such imperfections.