Role of Market Microstructure in Price Convergence: A Meta Analysis

Abstract

This study aims to revisit the assumptions of economic theory that lead to the predictions of competitive equilibrium theory. Extensive work has already been done to answer how well these assumptions of microeconomic theory approximate the real-world market. In this context, two kinds of tools can be found in the literature that tries to answer this question. One is experimental economics (EE) where individuals are involved in a simplified market that mirrors the real-world markets. Human behavior is observed here under an alternating set of rules. The second tool is agent-based Modeling (ABM) which approximates the real-world markets with artificial agents where every agent possesses unique characteristics and the market comprises a diverse set of decision rules. In ABM, computer simulations imitate human behavior. Our results, however, state that with Zero Intelligence agents, the market is not even closer to the level of prediction of a theoretical competitive market. It also makes sense as random number generations should not lead the market to a level of efficiency higher than human agents and we cannot rule out the importance of rationality possessed by humans to bring more efficient results than ZI agents with no rationality.