Prices as indicators of strongscarcitystrong - an experimental study of a.pdfVIP

Prices as indicators of scarcity - an experimental study of a multistage auction∗ † ‡ Tanga McDaniel / Andreas Nicklisch Abstract The price mecanism is the primary means of information trans- fer in decentralized economic systems. High prices indicate high demand, whereas low prices indicate low demand. Thus prices are the signals for accelerating or slowing production. However, us- ing sequential, multi-unit auctions, we show that the price mech- anism fails to be beneficial for producers in every case. As an ex- ample we discuss auctions for future access rights to a network. We use experiments to show that the incentives for free-riding inherent in auctions for future access provide inaccurate signals for investment. Keywords: auctions, capacity, experiments, investment, multi- unit, networks, sequential ∗The authors would like to thank Werner G¨uth, Paul Pezanis-Christou, Timothy Perry and participants at the Workshop on Experiments in Natural Resource Eco- nomics, Akureyri May 2004. This project was funded by the Newton Trust Institute, University of Cambridge, UK. †Appalachian State University Boone, Department of Economics, North Carolina 28608-2051, USA; email mcdanieltm@appstate.edu ‡Max Planck Institute for Research into Economic Systems, Strategic Interac- tion Group; Kahlaische Straße 10, D-07745 Jena, Germany; email nicklisch@mpiew- jena.mpg.de 1 1 Introduction In decentralized economies the price system transfers the relative impor- tance of a particular thing by attaching a numerical index which reflects its significance within the whole system (von Hayek, 1945). Thus, price is the medium of decentralized information exchange,