Instructions

This experiment consists of a number of rounds. The instructions explain the sequence
of events in each round.

1. The classroom is divided into 4 buyers and 4 sellers. Those wearing stickers are
sellers. Your role as a buyer or a seller will remain fixed throughout the experiment.

2. Each seller possesses 2 units of a fictitious good, while each buyer can purchase up
to 2 units of the good.

3. Each seller receives 2 purple cards. The number on each card indicates the cost of
selling each of the units that the seller possesses, that is, the minimum price at which
the seller would agree to sell the unit.

4. Each buyer receives 2 blue cards. The number on the buyer's card reflects the
buyer's value or utility for purchasing 1 unit, that is, the maximum price that the buyer
is willing to pay for this unit.

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 Instructions

5. A participant’s card is his own private information and needn't be displayed to other
participants. The participant maintains the same card(s) for the duration of the round.

6. Protocol for each round: participants meet in the center of the classroom and
negotiate with one another. If you are a seller you must negotiate with a buyer; if you
are a buyer, you must negotiate with a seller. You are free to move about and to
negotiate with anyone you choose from the other group.

7. A pair of participants (a buyer and a seller) who agrees upon a trading price comes to
the front of the class to inform an experimenter of their agreed price and turns in their
cards face down.

8. Buyers earn the difference between their utility minus the transaction price.
Sellers earn the difference between the transaction price minus their cost.

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 Instructions

9. The transaction price is written on the board for all participants to see.

10. The two parties to the transaction return to their seats and fill in the Record Sheet
(including round number, cost/utility, price and profit).

11. A participant who does not reach an agreement by the end of the round returns his
card to an experimenter. His profit from that round is zero.

12. At the beginning of each round, the experimenter shuffles all of the cards and
distributes them randomly to the participants.

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 Record Sheet

Seller / Buyer id number: _______

Cost / Utility
Round Transaction Profit
number Price
1.
2.
3.
4.
5.
6.
7.
8.

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From other Pit-Market Experiments

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6
 Competitive Equilibrium

Necessary conditions/assumptions underlying the model of perfect competition:

• Large number of consumers

• Large number of producers

• No government intervention, a free market

• No cartels or coalitions permitted

• Full information

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 How Necessary are these Assumptions?

• In this experiment, 8 sellers and 8 buyers participated

• I've conducted experiments with as few as 7 participants (e.g. 3 sellers, 4 buyers)

& obtained same convergence to competitive equilibrium

• are these the "large numbers of buyers and sellers" intended in the theory?

• according to the results of your experiment, 2 additional assumptions of the

competitive model are entirely superfluous:
1. no cartels or coalitions permitted: attempts to form a cartel ultimately fail
(competitive forces and the profit motive triumph over cartels)
2. full information: private information regarding your own cost or utility is
sufficient (publicizing previous transaction prices speeds up convergence)

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 Competitive Equilibrium

Necessary conditions/assumptions underlying the model of perfect competition??

• Large number of consumers

• Large number of producers

• No government intervention, a free market

• No cartels or coalitions permitted

• Full information

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 Conditions underlying the Experiment

• theory of perfect competition very general: no reference to type of good transacted,

market mechanism, geographic location or culture in which competitive eq'm holds

• However, any attempt to test the theory is necessarily very specific

• To what extent does the specificity of your experiment limit the scope of the result?

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 Restrictiveness of Experimental Conditions

• imaginary good
(not a limitation)

• decentralized pit market mechanism

(would converge with any? market mechanism according to non-satiation)

• economics/business students at a Canadian university

(anyone who can add and subtract)

• 8 sellers and 8 buyers

(at least 3 or 4 sellers and 3 or 4 buyers)

• each seller can sell 1 or 2 units of the good, while each buyer can buy 1 or 2 units
(units of supply and demand are not overly concentrated with any one buyer or seller)

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 Lessons from Market Experiment

• competitive equilibrium is not merely a theoretical construct

• we obtain competitive equilibrium outcome in laboratory experiment under even

more general conditions than those stated in model

• caution: does this mean that as long as there are ≥ 3 producers & 4 consumers
markets in industries outside the lab can be expected to behave competitively?

• No! important asymmetries between producers within an industry

 e.g. product differentiation to create market power (actual product
differentiation, advertising & marketing, geographical differentiation, etc.)

• question of external validity always arises with laboratory experiments, especially if

subjects representing firms & stakes are small

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