Chapter 5 Effect of Non-binding Price Controls in Double Auction Trading

This chapter focuses on the effect of non- binding price controls in double auction trading.Static price theory predicts that non-binding price ceilings and floors will have no effect on price determination in double auction markets. In fact they have substantial effects on price dynamics. Ceilings limit the negotiation strategies of sellers, while floors limit the strategies of buyers. The buyer side of the market responds with lower bids (in the ceiling case), and the sellers with higher offers (in the floor case) than would otherwise prevail, slowing convergence. Sellers have to learn to begin negotiation at the ceiling and concede only slightly, and similarly, buyers must learn to start at the floor and resist price concessions.