Learning from Trades

Abstract

I study stationary cut-off-strategy equilibria of a dynamic market model where buyers sample sellers sequentially from an unknown distribution. Buyers learn about the distribution from the sampled sellers and a 'trade signal'. The trade signal reveals whether a randomly chosen seller traded yesterday. Observing a trade (as opposed to no trade) is good news about the distribution. Buyers who observe a trade use a higher cut-off than buyers who observe no trade, despite buyers' learning from sampled sellers that puts a countervailing pressure on the cut-offs. The trade signal may reduce market efficiency, while an appropriate exogenous signal increases efficiency.

Informational Cycles in Search Markets

“…4 These models, if they are dynamic and have more than two time periods, focus on steady-state equilibria. Asriyan et al (2017) and Mauring (2017) study learning from a trade signal and Kaya and Kim (2015) and Kim (2017) from delay. 5 In them, a trade or delay is always either bad or good news about the market conditions because these papers focus on steady states.…”