Trading in exogenous networks: a theoretical application and experimental results

Author

Lisa Breger, Southern Illinois University CarbondaleFollow

Date of Award

12-1-2016

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Watts, Alison

Abstract

The Federal Communications Commission (FCC) allocates bands of radio frequency on the electromagnetic spectrum to agents call primary users (PUs), typically through standard auctions. However, with an increased demand for the use of radio spectrum, it is valuable to devise ways for unused channels to be sold in a secondary market to secondary users (SUs) who do not have licensing rights to access the spectrum. We first propose a model in which PUs can set prices and offer unused channels to SUs. We consider a small network of primary and secondary users in which the network is defined exogenously by their respective locations. In this framework, equilibrium prices depend on the structure of the network. We find that a SUs can potentially face two prices in equilibrium and that SUs with only one potential seller receive offers first but face high prices. We extend this model to consider cases of uncertainty between sellers to find a range of relative prices for which two prices arise in equilibrium. The implications of the results are twofold. First, with specially defined networks, PUs will extract all market surplus if given complete price-setting power. Secondly, uncertain competition in the market can benefit buyers since PUs may set prices more conservatively. While the first chapter focuses on the application toward spectrum sharing, it is worthwhile to note that the properties of this model can be extended to many applications. In the second and third chapters, we aim to test these price-setting predictions in an experimental study. The study was conducted using the software z-Tree (Zurich Toolbox for ii Readymade Economic Experiments) developed by Fischbacher (2007), and took place in a campus computer lab. Participants in the study made take-it-or-leave-it offers to potential buyers with whom they are linked in a repeated measures study. Across a number of sessions, we varied the network structure and price possibilities, as well as information on the network, to gain insight on how uncertainty of competition affected price offers. With this data, we tracked the convergence of price offers in each group and examined if and when equilibrium predictions were reached.