Economics resource request: highly inefficient markets

[CRGreathouse]

Much of undergraduate economics is dedicated to the study of efficient markets. This is a useful simplification in many fields -- no one cares who they buy stock from, and gasoline, wheat, and other commodities are almost as undifferentiated.

I've recently been considering markets that are highly inefficient and illiquid. Any thoughts on resources (PDFs, web sites, books, articles) to get me started?

 

[mheslep]

This should give you a good start:
http://ocw.mit.edu/OcwWeb/Economics/14-01Fall-2007/LectureNotes/index.htm
D21 Why markets fail (PDF)
D22 Monopoly (PDF)
D23 Monopoly and monopsony (PDF)
D24 Monopoly and monopsony (cont.) (PDF)
D25 Pricing with market power (PDF
D26 Pricing and monopolistic competition (PDF)
D27 Game theory and oligopoly (PDF)
D28 Oligopoly (PDF)

which track chaps 10-12 in the textbook:
Microeconomics
Pindyck, Robert S., and Daniel L. Rubinfeld.

 

[ascapoccia]

which track chaps 10-12 in the textbook:
Microeconomics
Pindyck, Robert S., and Daniel L. Rubinfeld.

:!) This is one of the best undergraduate texts on microeconomics on the market right now. Much more mathematical than many of them.

Unfourtunately, a lot of what I know are journal articles that you need subscription to see. However, if you have access, do a search on JSTOR or Project Muse. There is a lot of research going on in microeconomics/ industrial organization about the subject, though.

 

[Chaos' lil bro Order]

Much of undergraduate economics is dedicated to the study of efficient markets. This is a useful simplification in many fields -- no one cares who they buy stock from, and gasoline, wheat, and other commodities are almost as undifferentiated.

I've recently been considering markets that are highly inefficient and illiquid. Any thoughts on resources (PDFs, web sites, books, articles) to get me started?

How about the equity options market. The spreads between buy and sell on options that are well out of striking are very large. The volume is sparse and therefore the options illiquid.

The Classic car industry would be another example.

Also, the used Tool-and-die machine market is yet another.

 

[Enuma_Elish]

Just off the presses (almost) "A Failure of Capitalism: The Crisis of '08 and the Descent into Depression" by The Honorable Richard A. Posner

Solow's NYRB critique of same: http://www.nybooks.com/articles/22655

 

[mheslep]

Just off the presses (almost) "A Failure of Capitalism: The Crisis of '08 and the Descent into Depression" by The Honorable Richard A. Posner

Solow's NYRB critique of same: http://www.nybooks.com/articles/22655

More reviews here:
http://online.wsj.com/article_email/SB124139557611981725-lMyQjAxMDI5NDAxNDMwOTQ1Wj.html" - WSJ / L. Gordon Crovitz

"Although financiers bear the primary responsibility for the depression," he writes, "I do not think they can be blamed for it -- implying moral censure -- any more than one can blame a lion for eating a zebra. Capitalism is Darwinian."...
As Judge Posner told me in an interview, "The role of bankers is to operate banks, which is inherently a risky business. It's not to save the economy."

Washington Post review:
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/01/AR2009050101339.html"

Posner's May 7 WSJ article:
http://online.wsj.com/article/SB124165301306893763.html

 

[CRGreathouse]

Thanks, all of you! But most of these resources are for markets that are more efficient than I'm interested in. The equity options market is illiquid compared to, say, the stock market -- but more liquid and far more efficient than my target.

Also, the used Tool-and-die machine market is yet another.

Warmer. I did web design for such a company once, so I'm slightly more familiar with it than my uncalloused hands might suggest. But you can still walk into a company and walk out with a chuck or a hydraulic cylinder -- too easy.

The Classic car industry would be another example.

Hmm. That's not a market I'm familiar with, but it certainly seems plausible. It's certainly illiquid, though I was picturing a market with high transaction costs.

Just off the presses (almost) "A Failure of Capitalism: The Crisis of '08 and the Descent into Depression" by The Honorable Richard A. Posner

I follow his & Becker's blog, so I know about the book. But it's about market failure (and government failure to a lesser extent), not inefficient markets. Actually I believe he argues that there was too much liquidity in the system.

 

[CRGreathouse]

This should give you a good start:
http://ocw.mit.edu/OcwWeb/Economics/14-01Fall-2007/LectureNotes/index.htm

Looks like fine notes, but it's too basic for me. Also I think I misspecified: what I really want is markets that are inefficient by virtue of high transaction costs and the like:

• Search costs
• Bargaining costs
• Enforcement costs
• Information costs
• Switching costs

Basically, a market where Coase's theorem fails badly. But *not* a monopoly/monopsony.

 

[BWV]

You might look at the experimental economics literature. Vernon Smith, Charles Plott and others have created experiments to test all sorts of market environments. Search www.ssrn.com

the results have tended to show that very little common information is necessary for markets to function in contradiction to the commonly held belief that the neoclassical model requires participants to have perfect information

 

[Enuma_Elish]

IMO, the shortest way to finding inefficient markets is to ask "which markets present a substantial arbitrage opportunity?"

 

[CRGreathouse]

I'll look into experimental economics. I don't see anything relevant offhand, but it does look like a neat field.

IMO, the shortest way to finding inefficient markets is to ask "which markets present a substantial arbitrage opportunity?"

Heh. If I knew of markets with substantial arbitrage opportunities, I wouldn't need to work.

 

[Chaos' lil bro Order]

Thanks, all of you! But most of these resources are for markets that are more efficient than I'm interested in. The equity options market is illiquid compared to, say, the stock market -- but more liquid and far more efficient than my target.




Warmer. I did web design for such a company once, so I'm slightly more familiar with it than my uncalloused hands might suggest. But you can still walk into a company and walk out with a chuck or a hydraulic cylinder -- too easy.



Hmm. That's not a market I'm familiar with, but it certainly seems plausible. It's certainly illiquid, though I was picturing a market with high transaction costs.



I follow his & Becker's blog, so I know about the book. But it's about market failure (and government failure to a lesser extent), not inefficient markets. Actually I believe he argues that there was too much liquidity in the system.

So you want illiquid... How about used military aircraft? We sell old equipment to growing nations, such as C-130 transport airplanes, F-16 fighters, etc. Clearly, this market is extremely illiquid given that only a few hundred or a thousand perhaps, of these aircraft are ever manufactured. You may also consider used commercial aircraft since their market data is likely to be more accessible to civilians.

Other thoughts...

Used crane market

Used autoplant equipment (big ticket items) like injection molding units

Used mining truck market (some cost over $5million, see Diavuk mine)


Basically any market where large specialized equipment is the item of trade, is likely to be extremely illiquid, given that only a few dozen or a few hundred of such items exist on Earth in the first place.

 

[CRGreathouse]

Those are really good ideas. I'm going to try to see if I can find anything on them.