Download Competitive Market Versus Democratic Socialism in A Lab

Competitive Market Versus Democratic
Socialism in A Lab Experiment
Agborndip Ayukonchong and Manfred Königstein
University of Erfurt
Competitive Market Vs Democratic Socialism
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Introduction
– Despite the decline of real-existing socialist regimes many people
around the globe still dream the dream of socialism
• Maybe it did not work due to corrupt or stupid political authorities?
• Maybe it works if truly democratic?
• Maybe it works if individuals keep their freedom of choice?
– Ideal: Democratic socialism?
•
•
•
•
Has it ever been practiced?
Can we investigate empirically how successful such a system would be?
Can we compare this to market capitalism?
Before we can do that we need more specific concepts of democratic socialism and
market capitalism
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Introduction (2)
– Political conepts of socialism vary in broad range:
– Communism
• No private property, no private firms, allocation of goods equally or according to
needs
– Welfare captialism
• Private property, private firms, free trading, flexibility of prices AND some
regulations of firms (establish workable competition) AND social transfers (welfare
pay to unemployed, health insurance for everybody, …)
• Many european countries practice welfare capitalism to different degrees
• Germany: „Soziale Marktwirtschaft“
– In our view socialism should be clearly distinguished from welfare
capitalism to avoid misunderstandings
– For empirical purposes distinction of concepts is essential
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Introduction (3)
– From the viewpoint of economic theory we simply distinguish different
degrees of political intervention into markets
– Our concept of democratic socialism
• Democratically legitimated government determines prices for goods and services
• Consumers and producers trade freely at given prices
• Since price can not freely adjust to equate supply and demand, the government
applies a rationing scheme in case of undersupply/oversupply
• This is a relatively liberal form of socialism, but clearly distinct from welfare
capitalism
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Introduction (4): Research Questions
– We implement a democratic socialist institution (representing
interventionist market economy) in a lab and compare it to the double
auction institution (representing free market economy)
– We compare these two market institutions while keeping the same
market structure (i.e., ceteris paribus investigation)
– Such comparison is infeasible in real-existing economies
– We compare the development of price, quantity and efficiency
– Proposition: Socialism is rather inefficient even if democratic!
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Market Structure
– 6 Buyers, 2 Sellers (multi-unit buyers and sellers)
– For ease of understanding think of buyers as traders who buy goods to
resell them at known reselling values
– More generally: Reservation value, i.e. monet. equivalent of res. utility
– 3 Types of buyers (2 of each type): High value (Type A), intermediate
value (B), low value (C)
Unit
Buyer Reselling Values
Type A
Type B
Type C
1.
100
100
100
2.
100
80
80
3.
80
80
60
4.
60
60
60
– Buyer payoff: Reselling value minus trading price
Competitive Market Vs Democratic Socialism
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Market Structure (2)
– Seller‘s production cost (both sellers)
Unit Cost
Unit Cost
Unit Cost
1.
10
6.
30
11.
70
2.
10
7.
30
12.
70
3.
10
8.
30
13.
70
4.
10
9.
30
14.
70
5.
10
10.
30
15.
70
– Seller payoff: Trading price minus cost
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Market Structure (3)
– This is not an ideal „textbook“ market
– Few buyers and sellers: Market power
– Incomplete information: Cost and reselling values are private
information
– No walrasian auctioneer who collects plans for supply and demand at
varying prices until a market clearing price is found
– Nevertheless we may apply competitive market theory to come up
with a prediction for price, quantity and efficiency
– How well does the competitive market model fit empirically?
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Theory: Competitive Market Equilibrium
• Determine aggregate demand and aggregate supply
• Prevailing price is the price that equates demand and supply (competitive equilibrium price)
• Prevailing number of units traded is efficient (pareto-optimal); i.e., the number of units traded
maximizes social welfare (aggregated difference between buyer reselling values and seller cost
values)
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Theory (2): Comp. Equilibrium in Our Experimental Market
Competitive Equilibrium
•
•
•
Price: 60
Quantity: 20
Efficient surplus: 1680
• The competitive equilibrium concept predicts an efficient allocation
• A socialist planner should also try to implement an efficient allocation since this is collectively
rational (independent of political orientation)
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Theory (3): Efficiency in More Detail
– Efficient (pareto-optimal) allocation can be determined without relying
on flexible price and free trade
1.
2.
3.
Allocate available units to the highest value buyers
Production quantity should be allocated to firms (sellers) such that production is
realized at lowest marginal cost
Total quantity produced and allocated is determined by equalizing marginal buyer
value and marginal seller cost
– Efficient solution in our experimental market:
1.
2.
3.
Up to quantity 20 marginal buyer value (60) is larger than marginal cost (30) , but
for quantity 21 or higher marginal buyer value (60) is smaller than marginal cost
(70)
Quantity 20 is efficient
Total welfare (social surplus): Sum of buyer values (20 highest values) minus sum
of cost (20 lowest cost values): 1680
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Market Institutions
– Market structure (number of buyers/sellers and their reservation
values/cost) is not yet a full description of a market
– Market institution: Rules for interaction of buyers and sellers
• Bilateral bargaining: Buyers and sellers meet in pairs („oriental bazaar“)
• Posted offers: Sellers post prices, buyers may buy at posted prices („shopping in
supermarket“)
• Double auction: Buyers and sellers may post prices (bids/asks) and can accept
bids/asks of the other side („online trading in stock markets“)
• …
– These are examples of free market institutions (freedom of choice,
flexibility of prices, no governmental intervention), but one might also
consider markets with governmental intervention
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Market Institutions (2)
– Socialism can be thought of as just another market institution (market
with intervention by government and/or inflexibility of prices)
– Different types of socialism
– Command socialism: Buyers receive goods and sellers produce goods
according to what political authority mandates
• E.g., egalitarian socialism: Every buyer gets the same (this is clearly suboptimal if
buyers have different values for goods)
• Command socialism is most extreme form of political intervention, but one might
also think of more liberal forms of socialism that respect freedom of choice
– Democratic socialism
• Democratic authority determines price, buyers announce buying orders, sellers
announce selling orders (freedom of choice of buyers/sellers)
• A rationing scheme is implemented if necessary to equate demand and supply
• Note: Undersupply or oversupply was common in real existing socialist systems
Competitive Market Vs Democratic Socialism
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Experimental Market Institution: Double Auction
– Buyers and sellers announce bids and asks and may accepts bids/asks
of the other market side
Bid Price Queue
Ask Price Queue
B3: 20
S2: 90
B5: 50
S2: 70
B3: 55
S1: 69
Trades
S2: accepts 55
B3/S2: 55 (1. unit)
Bid Price Queue
Ask Price Queue
Trades
B5: 50
S1: 69
…
…
…
S2: 40
B8: accepts 40
B8/S2: 40 (2. unit)
– Sequence of trading prices: 55, 40, …
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Experimental Market Institution (2): Double Auction
– Run the double auction over several trading periods
– In each period the double auction starts again with same market
structure
– Period results: Average trading price, quantity traded, social surplus
– Investigate how these statistics evolve over periods
– Do they converge to the competitive market equilibrium?
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Experimental Market Institution (3): Democratic Socialism
– „Pricing committee“ (government, political authority) sets price
•
•
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4 Players randomly selected (one buyer of each type and one seller)
Committee is representative of population
Committee determines price by majority vote
Committee represents a democratic political authority
Members of committee suggest prices to other members
If at least two members agree on a price, this is the price set for that period
– Price set by committee is announced to all players
– Buyers place buying orders, sellers place selling orders
• Orders are executed fully if total supply equals total demand
• In case of undersupply, buyers are rationed (buying orders are cut at random to
equate to supply)
• In case of oversupply, sellers are rationed (selling orders are cut at random to
equate to demand)
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Experimental Market Institution (4): Democratic Socialism
– Run democratic socialist market over several trading periods
– In each period market restarts with same market structure
– Period results: Trading price set by committee, quantity traded, social
surplus
– Investigate how these statistics evolve over periods
– Do they converge to the efficient solution (competitive market
equilibrium)?
– Compare democratic socialism versus double auction:
• Both institutions are real-existing, imperfect market institutions that do not
necessarily achieve efficiency
• Which one is more efficient?
• How strong is the relative difference?
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Experimental Procedures
– Experiments run at the University of Erfurt
– 6 Experimental groups (sessions) for each institution (double auction,
democratic socialism)
– Decisions entered and communicated via computer network
– Software: Z-Tree
– Recruiting: Online recruiting system
– Incentivized decisions: Participants earn money as sellers/buyers
according to the market rules
– Each sessions comprisesd 15 trading periods and 2 unpaid trial periods
– Subjects earned an average of €10 which included a show up fee of €4
(45minutes per session)
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Empirical Results: Development of Price
•
•
•
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Average prices across 6 sessions
Double auction: Average trading price converges to competitive equilibrium price
Convergence from above: Sellers could initially exploit their market power to some degree
Democratic socialism: Price set by committee is persistently lower than equilibrium price
Competitive Market Vs Democratic Socialism
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Empirical Results (2): Development of Quantity
Double Auction
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Democratic Socialism
Time paths of quantity traded for 6 sessions (different colours) under each market institution
Reference line (black): Equilibrium quantity (efficient quantity) = 20
Double auction: Quantity converges to the competitive equilibrium level (efficient level)
Democratic socialism: Quantity is persistently lower than efficient level (with large and even
increasing variance)
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Empirical Results (3): Development of Social Surplus
Double Auction
Democratic Socialism
• Time paths of social surplus for 6 sessions (different colours) under each market institution
• Double auction: Social surplus converges to maximal efficiency (100%)
• Democratic socialism: Social surplus is persistently lower than maximal (with large and even
increasing variance)
Competitive Market Vs Democratic Socialism
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Summary and Conclusions
– Socialism performs poorly even if democratic!
– Democratic socialism in our lab experiment reproduces the mistakes
of real-existing socialist economies:
•
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Price set by political authority is relatively low (consumer-friendly)
Consequently there is overdemand (undersupply)
Buyers are rationed; quantity is lower than the efficient level
Social surplus is way below maximal and way below the level reached under a free
trading institution
• Political authority does not learn to induce higher efficiency
– The double auction induces convergence to competitive equilibrium
and maximal efficiency
• Competitive equilibrium theory is a good predictor of market outcomes even under
much weaker assumptions (i.e., more general conditions) than traditionally
assumed
• This latter finding reproduces results that have been reported in the literature
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