NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rational Frenzies and Crashes

Jeremy Bulow, Paul Klemperer

NBER Technical Working Paper No. 112
Issued in September 1991
NBER Program(s):   ME

Most markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide between buying now or later, rather than only now or never, buyers' current 'willingness to pay' is much more sensitive to price than is the demand curve. A consequence is that markets will be extremely sensitive to new information, leading to both 'frenzies, " where demand feeds upon itself, and "crashes," where price drops discontinuously. Although no buyer's independent reservation value reveals much about overall demand, a small increase in one such value can cause a large increase or decrease in average price.

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Document Object Identifier (DOI): 10.3386/t0112

Published: Journal of Political Economy, vol. 102, no. 1, pp. 1-23, (February 1993)

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