Essays on the effect of technological innovation on markets in developed and developing economies

Parker, Christopher D (2012) Essays on the effect of technological innovation on markets in developed and developing economies. Doctoral thesis, University of London: London Business School.

Abstract

This thesis is an empirical investigation into the impact technology has on markets in both developing and developed economies. I first examine how a text message based service providing price information to market participants is affecting geographic price dispersion in India's agriculture markets over and above mere access to mobile phones. Exploiting a natural experiment where bulk text messages were unexpectedly banned across India for twelve days, I observe a statistically and economically significant 7.6% increase in price dispersion attributable to the loss of the information provided through the service. Increases are concentrated in crops with high and medium levels of perishability. The research provides evidence that fair and unbiased information can be beneficial in creating more efficient agriculture markets. Next I describe the technology involved in collecting and disseminating the price information, highlighting the difficulties involved with setting up a successful and impactful information system where low-tech solutions are the primary price discovery method, and the way in which these challenges were overcome. Transitioning into developed economies, I examine brokers' routing practices to two competing electronic exchanges. Using data from U.S. brokerage firms, I find that affiliation, not network effects, is the most important factor driving the percent of orders sent to an exchange. The results highlight the importance of factors beyond traditional network effects in explaining new market success/failure and the need for exchanges to retain a group of dedicated users. Finally I examine technology-enabled trading practices that may negatively impact markets resulting in "flash crashes". Using a simulated equity market, I contrast current trading rules to a proposed rule in terms of market quality and high frequency trader profitability during times of high volatility. High frequency trading can lead to market aberrations highlighting the importance of creating policies that ensure market quality and prevent future flash crashes.