An Experimental Examination of the Simultaneous Determination of Input Prices and Output Prices

Abstract

This paper involves a test of the competitive equilibrium as a model of the interdependence that exists between input and output markets. The test was motivated by the questions of skeptical students who were just learning the details of the competitive model. It was also motivated as a natural extension of existing results. In essence, the interdependence between input and output markets has been observed in several laboratory studies in which arbitrage could occur in markets separated by space or by time [6, 599-624; 5; 8, 1063-1071; 3, 223-241; 1, 537-567; 2, 955- 981; 7, 106-127; 9, 1-33]. Goods acquired by an arbitrager or by a speculator can be viewed as inputs taken from one market and then when sold by the same agent in a spatially separated or a temporarily separated market, they can be viewed as outputs resulting from a simple production process. Thus, all experiments in which such market activity exists can be viewed as having involved production. However, in all cases studied to date the market interdependence was rather transparent and the production technology was linear. In this study, the problem posed for the multiple markets is not transparent and the technology is nonlinear.