An Introduction to Market Experiments
Catherine EckelUniversity of Texas at Dallas
Introduction Market experiments = laboratory
for policy testing and development Hard to visualize what experiments
are like without seeing one This auction is an example of one
of the earliest and most powerful experiments
Overview of Experiment Each table is a trading team in the
experiment - buyer or seller Make decisions about your trading
strategy as a group between rounds Designate one person as the “trader”
to act for your group during the trading periods
Sellers Each seller receives a cost of production
Your cost is the number on your record sheet Costs are reallocated each round
Sellers make money by selling above their cost
Remember: Your objective is to earn as much profit as you can
If your unit sells, you earn price – cost. Otherwise you earn 0. If you do not sell you do not incur production cost
Buyers Each buyer has a reservation value
Your value is the number on your record sheet Values are reallocated each round
Buyers make money by buying below their value
Remember: Your objective is to earn as much profit as you can
If you buy a unit, you earn Your Value – Price. Otherwise you earn 0. You do not make a profit on unbought units
The Market
All buyers and sellers receive values, costs At any time, a buyer can raise his bidding card
and when recognized say “Buyer X bids ___” At any time, a seller can raise her bidding card
and when recognized say, “Seller Y offers ___” Bids and offers are recorded by the recorder Bids have to improve on previous bids, and offers
have to be lower than the previous offer.
The Market, cont’d. At any time, any buyer can accept the
outstanding offer (raise your card!) At any time, any seller can accept the
outstanding bid (raise your card!) When a buyer and seller agree a sale is
made. Write down on your record sheet your price and profit.
Then all bids and offers are automatically withdrawn.
The market ends when there are no more trades, or 4 minutes, whichever comes first.
Your record sheet: SellersRound 1:
My Cost: (indicated on the form)
My unit sold YES NO
My Price: ____
Profit: ________
Highest selling price________
Number of units traded ____________ Lowest selling price__________ Comments:
Record: whether your unit sold, the price you sold it for, and your profit (price - cost).
In the bottom of the form record information for the round, including any comments
Your record sheet: BuyersRound 1:
My Value: (indicated on the form)
My unit sold YES NO
My Price: ____
Profit: ________
Highest selling price________
Number of units traded ____________ Lowest selling price__________
Comments:
Record: whether you bought a unit, the price you bought it for, and your profit (value - price).
In the bottom of the form record information for the round, including any comments
Fill out your record sheet Use one box for each round Notice your cost or value (it will change each
round) When your unit sells, fill out price Record whether your unit sold and calculate
profit Record market information
High and low price Units sold
Comments space lets you record particular things about this round.
How the experiment will go
The floor will open Bids must go up, offers must come down When a bid and offer agree (or a bid or offer are
accepted) a trade is made All outstanding bids and offers are withdrawn, and
the floor reopened. If you traded your unit, you are done for this round If you did not trade your unit, you may still trade When there are no more trades the market closes We will do several rounds of the market Costs and values are “reshuffled” each round to give
everyone a chance to earn money.
Remember Buy low and Sell high Try to make as much money as
you can
Envelope contains the “prediction”
What did we do?
Reproduced a market in the lab! Sellers had induced costs Buyers had induced values Implemented a specific trading
institution Oral Double Auction
When we collect data people are paid what they earn.
Auction Market: Demand and Supply
0
50
100
150
200
250
0 1 2 3 4 5 6 7 8 9
Units
Pri
ce
Reservation Values
Cost
Auction Market: Demand and Supply
0
50
100
150
200
250
0 1 2 3 4 5 6 7 8 9
Units
Pri
ce
Reservation Values
Cost
Equilibrium Price: $150
Auction Market: Demand and Supply
0
50
100
150
200
250
0 1 2 3 4 5 6 7 8 9
Units
Pri
ce
Reservation Values
Cost
Equilibrium Price: $150
Equilibrium Quantity: 7 units
What Else Can You Do With this Market? Examine the effects of policy
changes Taxes Quotas Tariffs Price Ceilings and Floors
Examine the results of changes in supply and/or demand by changing seller costs and buyer values
Results of a Double Auction Market Experiment
Double Auction
0
10
20
30
40
50
60
70
80
90
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Period
AvPriceG1
AvPriceG2
What else can you do? Compare trading “institutions”
Differences in the rules for trading Example: What is the effect of rules that
prohibit insider trading? Design new markets
Economic engineering: wind tunnel design Example:
Markets for pollution permits “Smart” market for wholesale electricity
“Take home” message: Markets can be reproduced in the lab Double auction lab markets converge
quickly to competitive equilibrium Lab markets can be used to test
theories or examine policies Lab markets can be used for “wind
tunnel” design of new markets
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