Market Efficiency Experiment
[adapted from Ted Bergstrom and John Miller, EXPERIMENTS WITH ECONOMIC PRINCIPLES, 2nd edition, 2000]
In this experiment, the instructor will divide the class into two groups. Some of you will be
producers of small rectangles of colored cardboard; others will be consumers of these small
pieces of cardboard.
Assumptions of the Market:

Each consumer can place an advanced order for one, and only one, piece of cardboard.

Each producer can accept an advanced order for one, and only one, piece of cardboard.

The instructor will provide each consumer with a number indicating the maximum amount he
or she is willing to pay for a piece of cardboard: the “MWTP” (maximum-willingness-to-pay,
or consumer’s reservation price) is a number between $1 and $100. The consumer’s score
for a single trading round equals the difference between his or her MWTP and the price he or
she negotiates with a producer. For example, if a consumer’s MWTP is $80 and he pays $30
for a piece of cardboard, his score (surplus) is $50. Each consumer has the option of not
placing an order for a piece of cardboard. This will be sensible if the best price he or she can
negotiate is greater than his/her MWTP. If a consumer does not place an order, his or her
score will be zero. A score of zero is better than a loss (negative score).

The instructor will provide each producer with a number indicating her or his “MWTS”
(minimum-willingness-to-sell, or seller’s reservation price which is determined by the cost of
producing a piece of cardboard [a number between $1 and $100]). The producer’s (or
seller’s) score (profit) for a trading round equals the difference between the negotiated price
and her or his MWTS. For example, if a producer takes an order for a piece of cardboard for
$20 and her cost is only $15, her score (profit) is $5. Producers have the option of not taking
any orders. This will be sensible if the best price she or he can negotiate is less than her or
his MWTS. If a producer does not accept an offer for an order, her or his score will be zero.
A score of zero is better than a loss (negative score).

A consumer may announce how much he or she is willing to pay and wait for a producer to
accept that price. Alternatively, a producer may announce how much she or he requires to
accept an order, and wait for a consumer to place an order at that price. Consumers do not
have to publicly announce their MWTP; nor do producers have to announce their MWTS.

Once a transaction has been arranged, the two people (one consumer and one producer)
inform the instructor of the trade, record the transaction, and then return to his or her seat.

There will be several trading rounds, each of which lasts a few minutes. As each trading
round unfolds, the instructor will post transaction information on the screen.

Your objective is to score as highly as you possibly can in each trading round. This will
likely require that you “shop around” – although you should bear in mind that only a few
minutes will be allowed for each trading round.
Market Efficiency Experiment
Warm-Up Exercises
After reading the set-up for this experiment on the previous page, please check your
understanding by answering the following questions.
Suppose that a supplier with a MWTS of $20 meets a demander with a MWTP of
$40.
1. If the supplier sells a cardboard rectangle to the demander for a negotiated price of
$35, how much profit will the supplier make? __________
2. How much of a surplus will the demander realize? __________
3. How much is the total surplus (seller’s profit + consumer’s surplus) made by the two
traders? __________
4. What is the highest price that the two could negotiate that would permit both the
seller and the buyer to make a surplus? __________
5. If this price were to be negotiated, how much would the sum of the buyer’s surplus
and seller’s profits be? __________
6. What is the lowest price that the two could negotiate that would permit both the seller
and the buyer to make a surplus? __________
7. If this price were to be negotiated, how much would the sum of the buyer’s surplus
and seller’s profits be? __________