American Economic Association
Price Controls and the Behavior of Auction Markets: An Experimental Examination
Author(s): R. Mark Isaac and Charles R. Plott
Source: The American Economic Review, Vol. 71, No. 3 (Jun., 1981), pp. 448-459
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1802791 .
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PriceControlsand theBehaviorofAuction
Markets:An Experimental
Examination
By R. MARK ISAAC AND CHARLES R. PLOTT*
Priceceilings
and pricefloorsarecommon
in all marketsystems.
The ancientGreeks
and Hellenistic
era Egyptians
are knownto
haveutilizedpricecontrols
(see H. Michele,
p. 272,and J.P. Levy,p. 41),and numerous
publicpolicyquestionstodayinvolvethem.
foras longas pricecontrols
Apparently
have
existed,theireffects
havebeendebated.For
example,Diocletion'sfavorableviewof his
priceceilings'was disputedby thereligious
philosopher,
Lactantius,who chargedthat
thepolicyled to "scarcity
and... low grade
articles"
(p. 145).
The standardpartial-equilibrium
theory
abouttheeffects
ofpricecontrols,
thetheory
whichis subjected
to so muchcriticism,
does
notseemtohavechangedsinceLeonWalras.
It is appliedwidelyto a varietyof market
institutional
arrangements
including
auction
markets
suchas thosestudiedbelow.If the
demandschedule
is downward
slopingandif
thesupplyscheduleis increasing
as shownin
Figure 1, thereshouldbe an equilibrium
price-quantity
pairof ($.60,20). Nonbinding
pricecontrols,
suchas a priceceilingat or
abovetheequilibrium
or a pricefloorbelow
shouldhave no effectson the
equilibrium,
If thecontrols
market.
arebinding,
suchas a
priceceilingat $.55 or a pricefloorat $.70,
thenthemarket
achievesan inefficient
pricequantity
pairwiththemarket
priceequaling
thecontrolled
price.
However,
inspiteofitsprominent
textbook
status,theapplicability
of themodelis questioned regularly.2
Criticismsrange from
complete
rejections
ofeconomics
toelaborate
theoriesof collusion.As an exampleof the
latter,considerthe"focalpoint"hypothesis
as foundin F. M. Scherer(p. 352). Perhaps
the priceceilingwill act as a focalpoint.
on a nonbinding
Sellers,by focusing
ceiling,
maybe able to tacitly
colludeto keepprices
above the equilibrium.
Thus,the otherwise
nonbinding
priceceilingcan have an effect
on prices.A similartheory
can be advanced
abouttheeffects
of pricefloors.For us the
of thisgeneralcontroversy
existence
and the
focalpointhypothesis
regarding
thedynamic
effects
ofpricecontrolsseemedsufficient
to
examination
of thesubjustifya systematic
ject.
*University
of Arizonaand California
Institute
of
Theobjectives
ofthisstudyaretoexamine
Technology,
respectively.
The financial
supportof the
the applicability
and/or accuracyof the
NationalScienceFoundation
and theCaltechProgram
modelas appliedtolaboratory
aucforEnterprise
and PublicPolicyis gratefully
acknowl- textbook
tionmarkets.
Our hope is thatby studying
edged.We thankJulieLaherty
forhercomments
on an
earlierdraft.
theimplications
of pricecontrolsin simple
'The following
fromRoman controlled
quotationis excerpted
we will be in a better
settings,
Civilization(pp. 464-66):
to
more
markets
position
analyze
complicated
In responseto theneedsof mankinditself,which
which
have
been
the
traditional
subjects
of
forrelease,we have decided
appearsto be praying
academicand scientific
concern.The choice
thatmaximum
pricesof articlesforsale mustbe
Wehavenotsetdownfixedprices,
forwe
established.
to studyauctionmarkets,
as opposedtoother
do notdeemitjust to do this,sincemanyprovinces formsof marketinstitutions,
an
reflected
occasionallyenjoy the fortuneof welcomelow
to
maintain
with
other
attempt
continuity
prices....
studies.Our resultsare notexexperimental
It is ourpleasure,
thatthepriceslistedin
therefore,
actlywhatwe expectedand theyprobably
in the
thesubjoinedschedulebe heldin observance
wholeof our Empire.And everypersonshalltake
raisemorequestionsthantheyanswer.
notethattheliberty
to exceedthemat willhas been
ended,butthattheblessingof low priceshas in no
way been impairedin thoseplaces wheresupplies
abound....
actually
EmperorDiocletian,The Edicton Prices,A.D. 301
2Duringthecourseofpreparing
thispaper,wenoted
severalheatedlocalpolitical
discussions
concerning
"fair
trading"of liquorproducts,rentceilings,and wage
floorsformunicipal
employees.
448
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VOL. 71 NO.3
ISAACAND PLOTT: PRICE CONTROLS
449
TABLE 1
SeriesI
No Experience
Experiment Period
No Controls
Controlsat
Equilibrium
Nonbinding
Controls
Binding
Controls
I
VII
IX
XII
Priceceiling
at equilibrium
Pricefloor
at equilibrium
Priceceiling5$
above equilibrium
Pricefloor54
below equilibrium
Priceceiling10?
above equilibrium
Priceceiling10$
below equilibrium
IV
V
all
9
9-10
9-11
SeriesII
Experience
Experiment Period
III
VIII
X
VI
1-3,7
9
9-10
7-11
II
all
all
all
VI
1-6
VII
1-8
III
VIII
4
1-8
IX
1-8
X
1-8
XI
all
III
VIII
5-6
10
XII
Mixed
Experience
Experiment Period
1-8
cent tradingcommission.
The value of the
redemption
valuesforeachindividual
is indiA total of twelveexperimental
sessions catedon Figure1.
wereconducted.
Each market
involveda seriesof "trading
Theseare listedin Table 1
to thesubject'slaboratory
were
according
market periods"in whichmarketparticipants
andaccording
experience
parameto theprice-control freeto buyand sell.The individual
institution
imposed.The instructions
were terswereidenticaleach period.By applicathoseofPlottand VernonSmith(Appendix, tion of the theoryof inducedpreference
pp. 147-52) and Ross Miller,Plott,and (and/or deriveddemand) the individual
Smith(Appendices,
pp. 610-21) witha price parameters
becomelimitpriceswhichcan be
ceiling(floor)provisionadded as indicated "summed"
inaccordwithcompetitive
market
in SeriesI (recruited
below.Participants
from theoryto producethe demandand supply
PasadenaCityCollege)had no previousex- curvesrepresented
in Figure1. Thesecurves
periencein laboratorymarkets.All par- remainedconstantoverall periodsand, exin SeriesII (recruited
ticipants
fromCaltech) ceptforsmallshiftsupwardby a constant,
had participated
in at leastone otherlabora- indicatedbelow,were the same across all
torymarketwithparameters
from experiments.
differing
theexperiments
Marketswereorganizedas two-sided
oral
reported
here.
had free
The laboratory
designof each experimen- auctionmarkets.All participants
tal sessionconsistedof an auctionmarket access to themarketfloorto makebids to
withfourbuyersand foursellers.Preferences buy(offers
to sell)or to acceptanyoutstandwereinducedfollowing
thetheory
ofinduced ing offer(bid). Each bid canceledprevious
preference
canceledpreviousoffers.
All
(see Smith;Plott).Buyersmade bids,and offers
moneyby buyingfromthe sellersand re- tieswerebrokenby randomprocess.
Theinstitutions
sellingto the experimenter
area series
beingexamined
accordingto
prespecified
terms.Likewise,sellersmade ofpriceceilings
andpricefloors.Specifically,
at
moneyby buyingfromtheexperimenter
thefollowing
is an exampleof a
paragraph
prespecified
costsandreselling
to thebuyers. priceceiling:"Duringthisexperiment,
no
In addition,each individualreceiveda five- bidsor offers
maybe madeor acceptedat a
I. Experimental
Design
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450
THE A MERICAN ECONOMIC REVIEW
$1.10
EQUILIBRIUM PRICE 60?
EQUILIBRIUM QUANTITY
20 TRADES
5
1.00
3
.90
7
.80
5,
3
.70
X
5 7
index to Individual
Redemption Values
1,3
5,7
.60
.50
4I
.40
Buyers I and 2
Buyers 3 and 4
Sellers 5 and 6
7
Sellers 7 and 8
I
7
.40
I
3
5
1,3
5
.30
I
I
5
7
3
3
.20
I 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I
.10
,
,
30
40
0
10
20
UNITS
FIGURE 1
price greaterthan cents. Of course, you
may stillmake or accept bids or offersat a
priceless thanor equal to thisamount."
In general,our experiments
can be divided
into seven categories as follows (P
maximum price, P =minimum price, PO
competitiveequili]3brium):
(1) no pricecontrols
(2) & (3) pricecontrolspreciselyat predicted
equilibrium(F= PO; P= PO)
(4) & (5) strictlynonbindingprice controls
(P>Po; P<Po)
(6) & (7) strictly
bindingpricecontrols(P<
PO; P>PO).
Not all categorieswere examinedbecause of
JUNE 1981
the expense and the natureof the evidence
obtained fromthe experimentswe did run
(see Table 1).
The resultsof the twelveexperimentalsessions are presentedin the followingsection,
witha particularemphasisupon thepatterns
which exhibitregularity,
and upon the relationshipbetween these results and the existingtheoreticalliterature.Additionally,we
will considerthe significanceof our results
forfutureresearch.
We have focusedthe studyon the following threeaspectsof marketbehavior:
1) Price Levels and Market Volume:
Price level refersto the average price of a
contract during a period. Sometimes the
rangeof pricesduringa periodis referenced.
Volume refersto the number of contracts
duringa period.
2) Market Responses to Institutional
Modifications:During the course of several
experimentsprice controls were removed.
Occasionallya controlwas added or changed
(see Table 1).
3) Efficiency: The efficiency index
developed by Plott and Smithis used here.
if and only
Marketsare 100 percentefficient
if the total of subjects'profitsand commissions is maximizedduringa tradingperiod.
The efficiency
is the actual sum of subjects'
profitsand commissionsdividedby the theoreticalmaximumof thissum.This measureis
related to the maximumof consumer'splus
producer'ssurplus.
11.Experimental
Results:SomePreliminary
Conclusions
We can report two major results and a
conjecture.The resultsare: First,thatmarket
behaviorunderpricecontrolsis moreclosely
approximatedby thecompetitivemodel than
by the focal point model; and secondly,that
marketsunder price controlsexhibitbehavioral regularitieswhich are not included in
standardanalysesand some of whichcannot
be explainedby the"traditional"competitive
model. Specifically,four such regularities
were noted: (i) controlsat the competitive
equilibriumcause marketprices to diverge
from the competitiveequilibrium; (ii) the
removal of nonbinding controls induces
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451
ISAAC AND PLOTT: PRICE CONTROLS
VOL. 71 NO. 3
$1.10
AVE. PRICE
VOLUME
EFFICIENCY
1.00 _
.90 -
61.28
14
55.70
17
56.25
16
56.33
18
57.21
19
58.15
19
58.35
20
59.00
20
92 1%
96.7%
94.4%
96.8%
98.4%
98.4%
100.0%
100.0%
6
7
8
90
.80 -.80
.70 -
70
-
-60
,-
.60
.50 -.50
/
.40 -.40
CONTROLS-~~~~~~~~~~~NO
.30
PERIOD
I
2
3
4
5
.20-
~~~10o 10
O
10
20
20
30
ENT I
FIGURE 2
40
FIGURE 2
changes in marketprices; (iii) inefficiencies
inducedby bindingcontrolsare greaterthan
those predictedby the standardapplication
of consumer'ssurplusanalysis.The amount
of additionalloss depends upon the method
of resolvingthe rationingproblem; and finally,(iv) adjustmentof priceswhenbinding
controlsare removedappears to involvean
or "jump" ratherthan a
initialdiscontinuity
continuousadjustment.The conjectureis that
nonbindingcontrolsact likea "buffer"which
holds prices below (above) the "natural"
marketequilibriumin the case of price ceilings (floors).
Since the two resultscan be easily demonstrated,we have organizedthe following
subsections,which contain a more detailed
examinationof the data, in a mannerwhich
thenatureof theconjecture.First,
highlights
we discuss the behaviorof marketswithno
controlsat all. It is herethattheconceptof a
naturalequilibrium(as opposed to the equilibriumpoint of the competitivemodel) is
explored.The second and thirdsubsections,
respectively,address the results of experimentswithnonbindingcontrolsand binding
controls.
The experimentalresultsare displayedin
Figures2 through13. Shownin thesefigures
are all contractprices arrayedaccordingto
the order (in time) in which the contract
occurred.The dotted line always indicates
the competitivemodel equilibriumprice (in
the absence of controls). During some experimentsinstitutionalchanges were made,
for example,a price controlmay have been
removedor imposed.A double line separates
the periods where institutionalchanges are
initiallyimposedand thenatureof thechange
is indicated on the figure.The equilibrium
price, average prices, volume, and efficiencies foreach periodare on thefigures.
A. No Price Controls
Three experimentswere conducted with
no price controls at all. These are ExperimentsI, II, and III (periods 1, 2, 3, and 7) on
Figures 2, 3, and 4. In addition,price controls were removed for selected periods in
(see Table 1).
otherexperiments
Laboratory markets(including those examined here),when organizedas a "double
oral auction"3withoutprice controls,invariably exhibitthe followingproperties.These
propertiesare importantsince theyserveas
standardsagainst which the effectsof price
controlscan be judged. (a) Efficienciesare
highand approach 100 percentand stabilize
3We referspecificallyto those in which, as here,
small tradingcommissionsare paid.
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452
THE AMERICA N ECONOMIC RE VIE W
$1.15
AVE PRICE
VOLUME
EFFICIENCY
-
1.05
48.79
19
98.9%
50.95
20
54.55
20
55.15
20
56.30
20
59.79
98.9%
99.0%
100.0%
100.0%
98.9%
19
JUNE 1981
61.20
20
63.30
20
64.0
20
65.55
20
100.0%
100.0%
100.0%
100.0%
9
to
.95 -
.95P
.85
.85
.75
.75 -
.65----
.65-
.55
.55-
.45
I4
~~~~~~~~~~~~~~~~~~~~NO
CNTROLtS
5
-
I
-
-
2
I35PERIOD
3
4
5
6
7
8
.25 .i5.
0
10
20
30
EXPERIMENT II
40
FIGuRE 3
$1.10
1.00
AVE. PRICE
VOLUME
61.75
20
60.05
20
60.00
20
60.00
20
50.00
16
50.00
16
60.00
20
EFFICIENCY
100.0%
100.0%
100.0%
100.0%
93.6%
90.17%
100.0%
_
.90
.90
.80
.80
-CEILING
.70 -.70
-
.60
-
.60
-
N
.504
.50-
40
<
2
20
30
PERIOD
I
50$
~~~~~AT
[
CONTROLS
.40
I,
-PRICE--CEILING-
r
2
e
O
~~~~~~~~CONTROLS
3
4
5
6
7
-
.20
.10
O
,
10
,
EXPERIMENT
,
40
FIGURE
once highefficiencies
are achieved(i.e., above
98 percent).(b) The varianceof pricestends
to diminishwithreplicationsof periods. (c)
If thereare manytradesat pricesotherthan
the equilibrium,they tend to be on both
sides of the equilibrium.(d) Average prices
tend to stabilize near the competitiveequilibriumprice.
ExperimentIII (Figure 4) dramatically
demonstratesthe frequently
observedpower
of the competitivemodel. Prices converge
almostimmediatelyto the competitiveprice
Im
4
with zero variance and 100 percent efficiency.While subjectsin thisexperimentdid
not know the marketparameters,theyhad
all had previous experiencein laboratory
markets.Subject experienceis suspectedto
be a primaryreason for the relativelyrapid
convergenceand low varianceof Experiment
III relativeto the other two no-controlexperiments(I and II).
Sometimesmarketshave sellers (buyers)
who are willingto sell (buy) units at prices
considerablybelow (above) the equilibrium
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VOL. 71 NO. 3
ISAAC AND PLOTT: PRICE CONTROLS
price even thoughmany trades occur at or
above (below) equilibrium.These individuals, who do not seem inclinedto "hold out"
for one of the betterdeals are called "relativelysoft"sellers(buyers).In ExperimentI
(Figure2) noticethatthefirsttradeor twoin
everyperiodis considerablyabove the other
trades. All of these contractsinvolved the
same "soft"buyer.In ExperimentII (Figure
3) noticethatmanylow-pricedcontractsoccur at thebeginningof each period.These all
involved the same two soft sellers whose
anxiousnessto sell resultedin low contract
prices.Exactlywhythisoccursis not known
(in ExperimentII, however,one of the soft
sellershad no previousexperiencein laboratory markets)but whateverthe reason the
behavior is usually "corrected"by the last
few periods. It is importantto notice,however,that "softness"seems to affectneither
the marketefficiency(in all three experimentsit is over98 percentby thefifthperiod
and increasing)nor the tendencyfor trades
to occur on both sides of equilibrium.Properties (a), (b), and (c) are exhibitedin all
three experiments.However, to the extent
thattheaveragepricesdivergefromtheequilibriumof the competitivemodel,we need a
conceptof a naturalequilibrium.The effects
of price controlsthen must be gauged relative to this natural tendencyas opposed to
thepredictionof thecompetitivemodel.
with supportingour
The major difficulty
bufferconjectureabove can now be made
clear. Indeed the softtraderproblemis the
reason the result is listed as a conjecture
instead of a conclusion. If soft buyers or
sellers exist, the average price may remain
removed from the competitiveequilibrium
price. Thus the influenceof price controls
mustbe measuredagainstthisnaturaltendencyratherthantheequilibriumof themodel.
But the natural tendencycannot be known
untilthe marketoperatesand since the softness of subjects may be modifiedby any
marketexperience,the veryact of observing
the "naturalequilibrium"whichdiffersfrom
modelmaycause it to
thatof thecompetitive
change. Thus, thereis currentlyno "fixed"
measureagainstwhichthe influenceof price
controlscan be identified.
Our initial experimentaldesign was not
At
constructedto deal with this difficulty.
453
best we are able to establishwithinour design the plausibilityof the bufferconjecture
and identifycertainpropertiesof the buffer
phenomenonif indeed it exists.
B. Nonbinding
Controls
Nonbindingpricecontrolsexistedin all or
parts of eight of the twelve experimental
reportedhere
markets.The firstexperiments,
as ExperimentIV (Figure 5) and Experiment
V (Figure 6), involveda price ceilingat the
competitiveequilibriumprice and Experiment VI (Figure 7) involveda floor at the
competitiveequilibrium.The results from
led to additionalexthesethreeexperiments
perimentswith nonbindingcontrols"near"
the equilibriumprice (ExperimentsVII-XI
on Figures8-12, respectively).
These will be
coveredin orderbelow.
Two conclusionscan be supportedby a
withnonbinding
referenceto all experiments
controls. First, the marketbehavior under
nonbindingprice controls is more closely
approximatedby thecompetitivemodel than
the focal point model advanced in the introduction. In no period of any experimentis
the average marketprice closer to the price
control than the competitiveequilibrium
price. When the ceilingis equal to the competitiveequilibriumprice,the averageprices
tend to divergefromthe ceiling.When the
nonbindingprice controlis not equal to the
competitiveequilibriumprice, the average
price (indeed the entirerange of prices) of
everyperiodis closerto thecompetitiveequilibrium. The rejection of the focal point
model in favor of the competitiveequilibriummodel seemsamplyjustified.
The second conclusion,on theotherhand,
highlightsa possible incompletenessin the
traditionalmodel. Removal of a nonbinding
price controlaffectsthe price level. The action seems to "disequilibrate"the market.
Nonbinding price controlsare removed in
ExperimentsVI- X (Figures 7-11, respectively). In every case the removal of the
nonbindingcontrolis followedby a movement in the average price. The only case
wherethe spiritof thisconclusionis violated
is ExperimentIII, period 4 (Figure 4) in
whichthenonbindingcontrolwas added after
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$1.10
1.00
_
AVE. PRICE
VOLUME
42.00
15
42.81
16
47.78
18
EFFICIENCY
81.4%
94.7%
96.5%
90
.90
.80
.80
.70
-
.60
[
53.00
18
53.90
19
54.95
19
55.82
17
56.50
18
57.10
18
96.7%
98.3%
98.0%
95.0%
96.3%
96.5%
_ -
-__
__
_
~P
_ -
C I I G T U $
CEILING AT 6
C
_
__
__
_
.50
.50
I
.40
.40
PERIOD
.10
-
51.25
20
100.0%
.70
.60
.20
JUNE 1981
THE AMERICAN ECONOMIC REVIEW
454
I
2
3
4
6
5
7
8
9
10
-
0
X
10
20
30
40
EXPERIMENT
Jv
FIGURE5
IV an efficiency
of
the markethad alreadyconvergedand in- thoughin Experiment
ducedno changesat all in thelevelofprices. 100 percentwas attainedonce duringan
modelstheequil- earlyperiod.In thepricefloorexperiment,
According
to traditional
of marketsdependonly VI (withexperienced
ibratingproperties
subjects),pricesconofexcessdemand.Since vergedto the floorin a mannerseemingly
uponthemagnitude
price controls contradictory
the removalof nonbinding
but
to the bufferhypothesis,
(period7), prices
of excessde- whenthefloorwasremoved
does not affectthemagnitude
droppedto a lowerlevel.Thus,
modelcannotaccount immediately
mand,thetraditional
hypothesis
the
fortheresulting
changesin thepricelevel. in thecontextof thebuffer
naturalequilibrium
was belowthecompetimodelmustbe
Exactlyhow the traditional
forthisgroupof subjects.
is not clear.Perhapsthe re- tiveequilibrium
supplemented
in thisexperiment
approximate
movalof controlsmakesavailableaddition- Efficiencies
al strategies
to one side or theother,there- 100percent.
advantages.Perhaps
by givingdifferential
Four experiments
(VII- X) were conin experimental
mar- ducted with nonbindingcontrolsplaced
any "announcement"
Perhaps withinfivecentsof the competitive
ketswillcause "disequilibrations."
equithe changecreatesadditionaluncertainty, librium.The bufferhypothesis
can be apencouraging
additionalsearchactiv- plied to all foursessions.The evidenceis
thereby
or strongestfor Experiments
and conservative
ityby someparticipants
VII- IX where
Clearly, tradesseldomifeveroccurat pricesbetween
softtrading
on thepartoftheothers.
are the pricecontroland the competitive
bothadditionaltheoryand experiments
equineededbeforethereasonsforthephenome- librium.
Whenthecontrolis removed,
prices
noncan be identified.
immediately
rise(fall)to above(below)the
the"buffer competitive
We turnnowto theconjecture,
in thecase of price
equilibrium
hypothesis"
by examiningfirstthe experi- ceilings(floor).In Experiments
VII and IX
mentswithpricecontrols
placedat thecom- the efficiency
level did not behavein the
IV-VI on
(Experiments
petitive
equilibrium
stable manner characteristic
of markets
Figures5-7). In the price ceilingexperi- withoutcontrols.Instead, the efficiency
IV and V, pricesarealmoststabilized sometimes
ments,
attainedthe98 percentlevelbut
at an averagebelow the ceilingwithfew did not remain.Experiment
X differsbeceil- cause pricesconvergedinitiallybelow the
equilibrium
tradesat the competitive
remainbelow 98 percent competitive
ings. Efficiencies
equilibriumbut even in this
withmarginalunitsnot beingtradedeven experiment
pricesfellwhenthenonbinding
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All use subject to JSTOR Terms and Conditions
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56.55
18
97.6%
54.06
18
98.4%
52.67
18
97.9%
51.60
15
90.6%
AVE. PRICE
VOLUME
EFFICIENCY
_
1.00
455
ISAACAND PLOTT: PRICE CONTROLS
VOL. 71 NO. 3
6
5
.20 -
.10
I0
O
20
EXPERIMENT
40
30
v
FIGURE6
$1.15
_
-
1.05
AVE. PRICE
VOLUME
EFFICIENCY
74.47
17
95.8%
72.81
16
92.0%
68.90
19
98.9%
65.60
20
100.0%
.95-
.95
.85-.85
.75
.75
____ V
.65
>
65
r55
[1
65.00
20
100.0%
65.00
20
100.0%
62.00
17
95.5%
-NO
[[[
45
.45
PERIOD
1
61.89
19
98.9%
2
3
4
6
5
7
8
O
CONTROLS
9
63.55
20
100.0%
62.75
20
100.0%
PRICE FL0OOR AT 65
-
..55
61.85
20
100.0%
10
-
11
.25
.15
0
0
10
,
,
,
20
30
40
EXPERIMENT
R[
FIGURE7
floorwasremoved.
Thus,forthisexperiment
must
applicationof the bufferhypothesis
assumethatthe sellerswere softand the
nonbinding
flooractedto holdpricesabove
thenaturalequilibrium.
In Experiment
XI (Figure12) a nonbinding ceilingwas placed ten centsabove the
Sincepriceshereconverged
very
equilibrium.
closetothecompetitive
andsince
equilibrium
thewhole
thecontrolremainedthroughout
wehavelittleto sayaboutit.We
experiment,
suspect,however,thatthe buffereffectis
weakat bestherewherethecontrolis "far"
price.
fromtheequilibrium
As indicatedabove,we can at bestspecuIt
effect.
lateaboutthereasonsforthebuffer
to do withtheinformamayhavesomething
ofExperiment
tionand "search."The results
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All use subject to JSTOR Terms and Conditions
456
THE AMERICANECONOMIC REVIEW
$1.10
AVE. PRICE
VOLUME
1.00
51.17
17
EFFICIENCY 95.3%
_
JUNE1981
55.88
17
55.44
18
55.82
17
57.10
18
19
18
95.0%
97.7%
97.9%
95.5%
98.9%
97.9%
55.50
60 37
57.56
57.66
16
19
93.2%
98.9%
f .70F____F__.90
.90
.70
.80
-
0.0
-~~~~~.60--
.60
CEILING
PRICE
AT 65$
[
__
___
----------
~~~~CONTROLS
.50 -.50.40
.40
PERIOD
2
I
4
3
6
5
7
8
9
60.05
20
100.0%
50.00
16
93.4%
.20 -
.10
0
,
10
|
20
,
30
EXPERIMENT
,
40
FIGuRE
$1.10
AVE.PRICE 4546
VOLUME
20
EFFICIENCY 1000%
1.00 _
.90
.90
.80-
.80
.70 -.70
8-.60
.60---
.50
.50-
.40
.40
PERIOD
I
48.11
18
96.8%
[
1
53.61
20
96.6%
_
__
-
----
M[
8
55.05
20
100.0%
56.20
20
100.0%
ICE CEILING
F~~~~~~
57.65
20
100.0%
59.25
20
1000%
59.80
20
100.0%
AT 615$---PRICE
CEILING
AT 50$
NO
'CONTROLS
I
2
3
4
5
6
7
8
9
10
.20 -
.10
0
10
20
30
40
EXPERIMENT
FIGuRE9
in thisrespect. 4) a priceceilingbelowtheequilibrium
was
III, period4, wererevealing
imposed.
ceilingtheremadeno
Addinga nonbinding
The experiments
weremotivatedby the
at all.
difference
buffer
hypothesis.
would
Perhapsthebuffer
workto keeppricesbelowa binding
control.
PriceControls
C. Binding
In thisrespect
thecontrol
couldbe viewedas
as
For thefirsteightperiodsof Experiment theoppositeof thefocalpointhypothesis
cents introduced
above.Perhapstheceiling(floor)
XII (Figure13) a priceceilingof fifty
existedwhichwas below the competitive acts as a signalto thebuyers(sellers)and
to holdpricesbelow
priceof sixtycents.The ceiling helpsthemcoordinate
equilibrium
(above)theceiling(floor).
was removedafterthe eighthperiod. In
As can be seen fromall thefigures,
this
VIII (Figure9) and
period10 ofExperiment
III (Figure alternative
seemsto be wrong.
hypothesis
in periods5 and 6 of Experiment
This content downloaded from 131.215.23.238 on Thu, 20 Feb 2014 15:29:52 PM
All use subject to JSTOR Terms and Conditions
$1.10
.
1.00
AVE. PRIE
VOLUME
73.00
11
68.67
Is
69.74
19
70.74
19
68.05
9s
68.10
19
64.15
19
61.16
19
59.27
is
56.16
19
EFFICIENCY
75.6%
97.5%
98.9%
97.4%
96.2%
98.9%
96.7%
98.9%
93.4%
98.9%
.90
.90
.80
.80
.70 -
.70
.60
457
ISAACAND PLOT: PRICE CONTROLS
VOL. 71 NO.3
[
------
----.60C------
-
-
PRICE
FLOOR AT 55$
.50 -.50
.-
-
NO CONTROLS
20
10
0
0
30
P
L
f
D
8
526E7
9
FIGURE10
$1.25
AVE. PRICE
9606
83.97
77.89
75.45
74.53
VOLUME
17
19
19
20
19
19
98.9%
98.9%
EFFICIENCY
1.15
1.05
95.5%
98.9%
98.9%
100.0%
74.20
74.20
20
20
19
1000%
1000%
73.53
73.05
9899%
la
97.7%
i.05-
[f&.
.85-.85
.75 --------
.75
$__55_PRICE
[
FLOOR
.65-
.65-
AT
70
-
$--
-----
7
7NO
CONTROLS
[...
.55*55
.45
.35
74.68
PERIOD
!
1
2
4
3
5
6
7
8
9
10
-
.25
.
0
10
!
20
.
30
.
40
EXPERIMENTx
FIGuRE 11
Pricesconvergerapidlyto thebindingceilings.Priceequalstheceilingand thevolume
equals the competitivesupply function
evaluatedat thepriceceiling.For thecase of
pricebehavesas
themarket
bindingcontrols
model.
by thetraditional
predicted
we disIn thecourseof theseexperiments
coveredtwomodesof behaviorwe did not
anticipate.The first"unexpected"results
occurredwhenthe controlswereremoved.
pathofpriceswhenthebindThe adjustment
from
ingceilingis removed
differs
somewhat
In period
thestandarddynamichypothesis.
XII thebinding
priceceiling
9 ofExperiment
was removed.The mean pricejumpedimcentsabove
to morethanthirteen
mediately
and thenconvergeddown toequilibrium
ratherthanadjustingconwardequilibrium
tinuouslyupward as suggestedby most
in adjustmodels.A discontinuity
dynamics
mentwas also presentwhena bindingprice
III (periods
ceilingwas addedin Experiment
(period7). In this
5 and 6) and thenremoved
market(in whichsubjectswereexperienced)
to
pricessimplyadjustedback immediately
without
attainedequilibrium
the previously
This latterresultsuggests
"overshooting."
in additionto possiblythe
thatinformation,
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All use subject to JSTOR Terms and Conditions
JUNE 1981
THE AMERICAN ECONOMIC REVIEW
458
$1.10
AVE. PRICE
VOLUME
EFFICIENCY
1.00 _
.90
.90
.80
.80
-
.70
[
C
.7X0
PR ICE
.60----
.60
93.8%
60.20
19
98.9%
59.77
18
97.8%
58.95
19
98.9%
57.88
17
96.8%
56.00
18
97.8%
53.00
19
98.9%
49.81
16
49.27
15
92.5%
CEILING
AT
-
70?
_
- m
.50 -.50
.40 -.40-
I
PERIOD
4
3
2
8
7
6
5
.20
EXPERIMENT
.10
0
E
40
30
20
10
FIGURE 12
$1.10 .00
AVE. PRICE
47.25
48.43
48.63
VOLUME
EFFICIENCY
16
93.6%
16
91.1%
16
93.4%
,49.50
16
90.3%
49.75
50.00
50.00
50.00
73.85
64.55
57.10
16
93.5%
16
91.7%
16
93.4%
16
94.4%
20
99.6%
18
97.9%
19
98.9%
F
.80-.80
F
.70-
.70
.60 -----.60t
.50
.60
.50
.40
.40 -
_
_
60
.30
PERIOD
_
i
AT 504
CEILING
FRICE
-
----
NO CONTROLS
.
I
2
3
4
6
5
7
8
9
10
1
.20 .10
.10
0
,
10
,'
20
,
30
t
EXPERIMENT
MI
40
FIGURE 13
demandat fiftycentsis
sale, yeteffective
demand,playsa
ofexcessmarket
magnitude
minimum
possibleloss
The
units.
of adjust- twenty-two
role in the formation
systematic
occurs
the
to
ceiling
price
due
efficiency
of
experimentation
mentpaths.Of coursemore
with
units
demand
sixteen
the
precisely
when
necessary.
are
and theory
value are traded.The
Secondly,analysisof these experiments highestredemption
under the
withbindingcontrolsrevealsa sourceof maximumattainableefficiency
ornot
Whether
percent.
is
95.73
ceiling
price
economin
the
notoftenstressed
inefficiency
is attaineddependsuponthe
lossescanresultfrom thismaximum
Efficiency
icsliterature.
a first
process.In theseexperiments
boththepriceceilingas wellas thechoiceof rationing
which
in
used
was
method
served
first
the rationingprocessused in conjunction come,
withbindingpricecontrols.Becauseof the tieswerebrokenby a randomprocess.As
XII, at can be seen on Figure 13, this rationing
priceceilingin Experiment
fifty-cent
In evfor processinducesitsowninefficiencies.
mostsixteenunitsmaylegallybe offered
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VOL. 71 NO. 3
ISAAC AND PLOTT: PRICE CONTROLS
ery period of ExperimentXII efficiencyis
below the 95.73 percent. Naturally other
methodsof solvingtheallocationand queueing problemresultingfromthe price ceiling
may have different
efficiency
properties.
III. Summary
459
(in the sense used in partial-equilibrium
analysis) is not sufficientto conclude that
the controlsare neutraleitheras to the conduct of prices or to marketefficiency.
Conversely,the factthatmarkettransactionsare
occurringbelow a price ceiling or above a
price floorwill not be sufficient
to conclude
that removingcontrolswill leave prices and
quantitiesunchanged.
In summary,
we foundthefamiliarpartialequilibriummodel worksremarkablywell to
describelaboratoryauctionmarketbehavior
in thepresenceof pricecontrolsand, particuREFERENCES
larly, when the price controls are strictly
binding.However,we also discoveredsome
Lactantius,
"The Deaths of the Persecutors,"
in Lactantius: The Minor Works, transempiricalregularitieswhich the traditional
lated by Sister Mary Francis McDonald,
theory cannot explain. Nonbinding price
controlsseem to affectthe average level of
Washington1964.
prices.Furthermore,
price levels and market J. P. Levy,The EconomicLife of theAncient
efficiencycan be influencedby removing
World,Chicago 1964.
nonbindingcontrols.Exactly how the stanNaphtaliLewis and Meyer Reinhold,Roman
dard modelcan be extendedto explainthese
Civilization,Vol. II, New York 1951.
resultsis unclear.The crucialfeaturesof the
H. Michelle,The EconomicsofAncientGreece,
institutions
whichinducetheresultshave not
Cambridge1957.
been identified.Perhaps other institutions R. M. Miller,C. R. Plott,and V. L. Smith,
induce similar behavior. Perhaps many of
"IntertemporalCompetitiveEquilibrium:
our observationscan be attributedto the
An Empirical Study of Speculation,"
werechangedand
singlefactthatinstitutions
Quart.J. Econ., Nov. 1977,91, 599-624.
have nothingat all to do with the essential
C. R. Plott,"The Applicationof Laboratory
featuresof price controls.Nevertheless,the
ExperimentalMethods to Public Choice,"
existenceof empiricalregularitiesseems unin CliffordS. Russell,ed., CollectiveDecideniableand we offerthemas a challengeto
sion Making: Applicationsfrom Public
theoristswho are extendingthe standard
Choice Theory,Washington1979.
models to include expectations,strategicbeand V. L. Smith,"An Experimental
havior, and/or the availabilityof market
Examination of Two Exchange Instituinformation
to participants.
tions," Rev. Econ. Stud., Feb. 1978, 45,
133-53.
Subject to qualificationsthatmustaccompany any application of laboratoryexperi- F. M. Scherer, IndustrialPricing, Chicago
1970.
mental methods,the resultspresentedhere
V. L. Smith,"ExperimentalEconomics: Inare of potentialinterestto the public policy
duced Value Theory,"Amer. Econ. Rev.
analyst. Diocletion claimed that his price
Proc.,May 1976,66, 274-79.
ceilingswouldhave no effectin regionswhere
theywerenot binding.These resultssuggest Leon Walras, Elementsd'Economie Politique
Pure, trans. W. Jaffe,Elementsof Pure
thathe mighthave been wrong.The observaEconomics,Homewood 1954.
tion that the price controlsare not binding
This content downloaded from 131.215.23.238 on Thu, 20 Feb 2014 15:29:52 PM
All use subject to JSTOR Terms and Conditions