Wednesday, September 9, 2009

Experimental Markets: Introduction

This semester I teach a class consisting of 220 students. The class earns the students 4 hours of credit, and to earn one of those hours they must participate in a weekly laboratory where they act as buyers and sellers. Buyers work off demand curves and sellers work off marginal cost curves, both attempting to make profits and will be graded based off their profits. There are two sessions in each lab, and each student acts as both a buyer and a seller during each lab.

In a series of postings I will document various experiments conducted with the students to illustrate the intersection of government and markets. This posting is an introduction.

After two weeks of learning how to trade and calculate profits, last week the teams played for real for the first time. There were a total of 102 buyers and 102 sellers, and while trading was dispersed across four labs, I will treat them as if they all traded in one single market.

Sellers - Their marginal cost curves were MC = 3 + 1.1(q).
Buyers - Their demand curves were 17 - 1.1(q)

Supply and demand theory predicts that the equilibrium price will be 10 exactly and the equilibrum quantity will be 649. What actually happened? The weighted average price was 10.38 and the total bought/sold was 567. As far as price is considered, it would be hard for supply and demand to predict their behavior any better.