Information, rationing, and coordination in experimental posted offer markets

A standard result in economics, which also conforms to simple intuition, is that a higher number of informed buyers in a market lead to lower prices (see Varian 1980). Recent theoretical research by Ben Lester (2011) has suggested that this conclusion no longer holds true if sellers are constrained by the number of goods they can sell. It is shown that prices may even increase if the number of informed buyers increases. The reason is that a buyer that can observe all prices in the market anticipates that also other informed buyers have an incentive to buy where it is cheapest. Due to the capacity constraint on the seller?s side, this implies a crowding effect, however. Goods that are very cheap are difficult to obtain. Thus, informed buyers will consider going to sellers with higher prices as well to avoid the competition from other buyers. Examples for markets with capacity constraints are the housing market, where the number of houses with certain characteristics is limited, or the market for medical s ervices by a local doctor. However, it is difficult to test this outcome using real world data, as the informedness of buyers is difficult to measure. Moreover, the theoretical outcome predicted by the work of Lester (2011) supposes that the involved subj ects are able to follow a complicated reasoning to arrive at the theoretical best responses. Therefore, it is not obvious if this result of increasing or non-decreasing prices holds under real-world conditions. Our approach therefore is to test the theo retical prediction by conducting experiments in the laboratory. While our main purpose is to test the theoretical prediction with real human subjects, the question of how prices relate to buyer informedness is also of practical interest. Price transpare ncy has long been considered as a useful policy to pursue in order to benefit consumers. It is important to understand under which conditions such increases in transparency yield welfare benefits.