Download A Double Oral-Auction Market

A Double Oral Auction Market
ECO 110
Professor Mike Rizzo
Friday, February 18th
Introduction
I. In class today, you will participate in an experiment that demonstrates how buyers and
sellers interact in a market, and how market forces lead to market equilibrium.

II.
Recall what we mean by markets – we simply refer to any agglomeration of buyers
and sellers. In other words, a market is any set of arrangements people use to
make exchanges.
The text makes no mention of the concept that markets can be organized in a number of
ways. Market organization simply refers to the mechanism through which buyers and
sellers communicate and execute transactions. Below are some examples:

Posted Offer Market: These are markets you are most familiar with. In these

Negotiation: Just as with used cars and commodities such as timber. Negotiated

Sealed Bid Market: In these markets the prospective buyers of a product or service
markets the sellers of a product or service list a price and the buyers of that product
are free to either accept that price (and execute a transaction) or not accept that
price (no trade occurs). Think “sticker price.”
sales involve face-to-face bargaining between you and the buyer. You know the
price you want to receive and the buyer knows the maximum price she will pay.
submit confidential offers in writing for the product a seller wishes to sell. Sealed
bidding limits your ability to negotiate prices, as all bids are opened at a specific
place and time. If a bidder meets your minimum bid requirements, no further price
negotiations should be pursued.
o
III.
There are many more types of market organization. Although the
organization of a market affects the way a price is determined, the same
fundamental forces of supply and demand are at work in every market – so
theoretically, the same market price would emerge in a market regardless of
how it was organized.
In today’s class, the market will be organized as a double oral auction.

This is similar to how “pit” markets work (such as the Chicago Mercantile Exchange).

Buyers yell out their bids (how much they want to pay for a particular good at this
time) and sellers yell out their offers (how much they are willing to sell their good for
at this particular time) so that all market participants can hear them.
Instructions
Each of you will be participating in the market for three-toed tree sloth hair.
IV.
After you have read these instructions I will hand you a card indicating whether you are a
buyer or a seller in this market.
Buyers
 Buyers will receive a card indicating a demand price or the maximum amount you
would be willing to pay for a unit of tree sloth hair (although you prefer to pay lower
prices).

You might want to think of this number simply as how much you value tree sloth
hair. Some of you like tree sloth hair more than others.

If you can buy tree sloth hair for a price less than the total value to you, you have in
some sense made a “personal profit” – a good deal for you. Economists call this
concept consumer surplus.
o
For instance, if your buyer value is $60, that’s how much you are willing to
pay for a unit of sloth hair. If you only have to pay $30 for it, you have in
some sense “made” $30 – this is your consumer surplus.

When interacting in the market, it makes sense not to pay MORE than the value on
your card – you are spending more than you want to, so you ought not do it. You
are indifferent if the price equals your value, so you should be willing to consider
executing these trades.

Your goal in this experiment is to maximize your personal profits, or your consumer
surplus.
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Sellers
 Sellers will similarly receive a card indicating a supply price or the minimum amount
that they are willing to accept in exchange for a unit of tree sloth hair (although you
prefer to receive a higher price for your good).

You might think of this supply price as the marginal cost of production. Some of you
may own a tree farm and tree sloths are plentiful, so it will not take much effort to
give a sloth a buzz-cut. Some of you may not own a tree farm and therefore must
travel to a public park, find a sloth and then give it a haircut – this is more costly.

For the purposes of this experiment, tree sloth hair is made to order – so that you
only cut hair if you make a sale. In other words, if you cannot sell a unit of tree
sloth hair at your offer price, you incur no costs.

If you can sell a unit of tree sloth hair for more money than it costs you to make it,
you have made a profit. Economists often refer to the profits of firms as producer
surplus.
o
For instance, if it costs you $40 to cut the hair off of a sloth, and you can sell
that hair for $75, then you have made a $35 profit on the sale of that unit of
hair.

When interacting in the market it would make little sense for you to sell a unit of
sloth hair for a price LESS than it costs you to make it – you would be losing money.
You are indifferent if the price you can fetch is exactly equal to your cost of
production – so you should be willing to make these trades.

Your goal in this experiment is to make as much in profits as you can.
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Guidelines
a) The three students with the largest consumer surplus and the three students with
the largest producer surplus after the experiment will be able to “drop” three
questions from being graded on the next problem set (you still need to do them of
course).
b) Put your name on buyer – seller sheet when you receive it.
c) Do not reveal your value or costs to others in the class. This might be obvious to
you – if a bag of sloth hair is worth $100 to you, would you want the suppliers to
know this when it might only cost them $20 to make it?
d) Your goal as both buyers and sellers is to make as much “surplus” as possible.
e) When a buyer and seller have executed a trade – i.e. agreed to a sale price – come
to me at the front of class so that I can record the value in my spreadsheet.
f) You can only buy one unit if you are a buyer and you can only sell one unit if you
are a seller. After a transaction has occurred, mark it into your Buyers or Sellers
record sheet, and then move aside so that you do not interfere with the remainder
of the trading.
g) Each round is independent – so after each round the slate is clean. You may trade
with the same person in each round or you may “shop around.” However, your
buyer value remains the same in each round as does your seller cost.
h) You might want to take note of the prices of transactions that are taking place in the
room around you.
i)
Trading will start at my signal and each round will last 3 – 4 minutes. Be prepared
for loud and vigorous trading.
o
When the trading begins – buyers will SHOUT out “bids” – in other words, if
you are a buyer, announce to the class how much you want to pay for an
item. If there is a willing seller, she might accept the bid.
o
When the trading begins – sellers will SHOUT out “asks” (you can see how
this gets crazy) – in other words, if you are a seller, announce to the class
how much you wish to receive for the sale of your product. If there is a
willing buyer, she might accept the offer.
o
As each trade is executed, I will announce to the class the price that this last
unit sold for.
j) Please feel free to move around the room – be sure to call out your bids or offers
loudly and take your time “shopping around” for the best prices.
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