ABSTRACT

The competitive equilibrium model is a universally accepted framework for determining market prices. It aligns with competitive market outcomes when its assumptions are fulfilled. These assumptions include the rationality of market participants, access to complete information, a large number of buyers and sellers, and the absence of transaction costs. This model predicts that markets will exhibit allocative efficiency, price convergence, and volume efficiency. Initial empirical evidence in experimental economics shows how supply and demand forces establish the equilibrium price. Double Auction (DA) market experiments demonstrate efficient outcomes, even with fewer participants and market improvement rules. Subsequent variations relax market assumptions by replacing human traders with Zero Intelligence (ZI) agents in an agent-based model. These models achieve market efficiency through the Marshallian trading sequence. However, the introduction of an alternative (Randomized) trading sequence in this thesis reveals that market efficiency is sensitive to microstructure details governing market setup. Rationality is introduced in an Agent-Based Model (ABM) populated with Zero Intelligence Plus (ZIP) agents to address shortcomings in achieving price convergence. Results of simulations with ZIP agents ensure that rationality, to some extent, is necessary for allocative and volume efficiency while achieving price convergence across different trading sequences. This dissertation further evaluates the market efficiency of ZIPH agents under various trading sequences and different demand and supply schedules, i.e., symmetric, asymmetric, and box shaped schedules. Additionally, an empirical application of these theoretical results and implications regarding price formation is applied to the labour market, utilizing data from the HIES to assess the importance of market microstructure. The mechanism of price formation amid frictional (search and transaction) costs at varying minimum wage levels is evaluated. Additionally, the welfare impact of the minimum wage on market efficiency is investigated through alternative measures like the Matching Principle. Despite high market frictions, the results affirm that government involvement does not negatively impact employment levels but increases employment for specific market microstructure. Keywords: Price formation, market efficiency, agent-based model, ZI agents, learning mechanism, market microstructure, price convergence, and competitive market.