2006 Mid-Term Elections and Perfect Competition

One way to examine how competition works in the economy is to look at the Stock Market. An interesting market that has popped up in recent years has been the prediction markets such as tradesports. Tradesports has been a good predictor of previous elections, books, popes and other events.

For this year, tradesports has a prediction market up for "Republican controll of congress during the midterm election." You can view their current up to date predictions here.

The market is currently predicting the Democrats to take over the House of Representatives (by a large portion) and the Republicans to hold on to the Senate (although if you look at the predictions for each individual race, the market is predicting a large Democratic pickup).

The main reason why these markets have been so good at predicting events is that there are a lot of people trying to make money of these things. Since they have to put their money where their mouth is, they overall bet they make tends to be very accurate. If someone tries to screw up the market, then other people re-enter with money and bid back the contract to its equilibrium price.

Let's see how accurate this prediction is on Tuesday.