Prices as indicators of scarcity - anexperimental study of a multistageauction

The price mecanism is the primary means of information transferin decentralized economic systems. High prices indicate highdemand, whereas low prices indicate low demand. Thus prices arethe signals for accelerating or slowing production. However, usingsequential, multi-unit auctions, we show that the price mechanismfails to be beneficial for producers in every case. As an examplewe discuss auctions for future access rights to a network.We use experiments to show that the incentives for free-ridinginherent in auctions for future access provide inaccurate signalsfor investment.