Lag is bad for the market. But it does not intrinsically cause the price to drop.

The lag just amplifies an effect that is already there due to most investors being pure speculators. That effect is panic setting in as soon as the price begins to drop. We were/are for sure in some form of speculation-induced bubble, and here's why.

If people genuinely valued their bitcoins at $200+, they wouldn't have freaked out and dumped them at a fraction of that when things began to turn sour. But, despite their evangelising on this subreddit and other places, in the end they only saw the coins as a tool for short term gain and when that illusion began to disappear they wanted out ASAP.

If people genuinely believed in the value of bitcoins, lag would cause panic buying not panic selling, because as mtgox began to lag, they would be worried that the price was in fact shooting up without their knowledge and if they did not buy right now who knows how high the price will be when things calm down? But of course, the speculators were not genuine believers and when lag began to set in... they had the opposite reaction and they issued market sell orders because of course they were thinking they had to sell right now or else the price will have hit the floor when things calm down.

Efficient, functional exchanges will not magically make the price of bitcoin rise (without another round of speculators with a death wish.) But they will facilitate a bitcoin economy that is also developing on other fronts, which we thankfully seem to be seeing.

TL;DR: Lag on exchanges only induces panic selling in an overhyped speculation bubble. It is not the root cause for price drops. In steady markets primed for genuine growth it would merely be a hindrance to faster trading.

Note: This is just a theory of mine. I come up with theories all the time. Please tell me if this one doesn't make sense. I'm here to learn.