Market Efficiency Experiment
based on Ted Bergstrom and John Miller, Experiments with Economic Principles, 2nd edition
Assignment is due: Saturday, February 15, 11:59pm.
Introduction.
We conducted three separate sessions in this experiment.
In Sessions 1 and 2, traders were allowed to make the best
deal they possibly could, without any restrictions placed
upon who they could trade with.
In Session 3, the government imposed restrictions on
market participants, matching certain types of buyers and
sellers. In Session 3, the distribution of buyer and seller
types was exactly the same as in Session 2 [see Table 1].
Participants were still free to negotiate the best deal they
could, subject to the government constraints.
The purpose is to see what effects government intervention
has on a competitive market.
Table 1.
Distribution of Types of Market Participants
GOVT 2301
Type of Trader
No. in Session 1
No. in Sessions 2 & 3
Low-Cost MWTS ($10)
8
5
High-Cost MWTS ($30)
4
9
High-Value MWTP ($40)
5
9
Low-Value MWTP ($20)
10
4
The table above indicates two types of participants in our experimental market: suppliers and
demanders (or sellers and buyers, if you prefer). To be more precise, there were two types of
suppliers: those with “low” seller costs of $10 and those with “high” sellers costs of $30. The
seller costs represent the costs of producing a cardboard rectangle, therefore, sellers would not
be willing to take an order for a cardboard rectangle for any amount less than their seller costs.
Their seller costs constitute their minimum-willingness-to-sell (MWTS) or seller’s reservation
price. We similarly had two types of demanders: those with a “high” buyer value of $40 and
those with a “low” buyer value of $20. The buyer values represent the monetary equivalent of
the amount of satisfaction buyers derive from consuming cardboard rectangles. Their buyer
values represent their maximum-willingness-to-pay (MWTP), or buyer’s reservation price, for a
cardboard rectangle.
Table 2. Market Efficiency Experiment, Summary of Results
Session 1
Session 2
Session 3
Average Price
$22
$27
$32
Number of
Transactions
8
9
7
Total Profits of
All Sellers
$97
$77
$72
Total Surplus of
All Consumers
$83
$93
$58
Total Profits of
All Participants
$180
$170
$140
To see how the demand schedule below was determined, click your mouse to reveal the
questions we need to ask (and their answers):
If the price for cardboard was above $40, how many of our 15 demanders would be willing to buy?
0
If the price for cardboard was exactly $40, how many of our 15 demanders would be indifferent to buying?
5
If the price for cardboard was exactly $20, how many of our 15 demanders would be indifferent to buying?
15
If the price for cardboard ranged between $20 and $40, how many of our 15 demanders would be willing to buy?
If the price for cardboard was less than $20, how many of our 15 demanders would be willing to buy?
15
Session 1
Demand Schedule
Price Range
Amount Demanded
P > $40
0
$20 < P < $40
5
P < $20
15
5
To see how the supply schedule below was determined, click your mouse to reveal the
questions we need to ask (and their answers):
If the price for cardboard was less than $10, how many of our 15 sellers would be willing to sell?
0
If the price for cardboard was exactly $10, how many of our 15 sellers would be indifferent to selling?
8
If the price for cardboard was exactly $30, how many of our 15 sellers would be indifferent to selling?
12
If the price for cardboard ranged between $10 and $30, how many of our 15 sellers would be willing to sell?
If the price for cardboard was more than $30, how many of our 15 sellers would be willing to sell?
12
Session 1
Supply Schedule
Price Range
Amount Supplied
P < $10
0
$10 < P < $30
8
P > $30
12
8
Figure 1: Supply and Demand for Cardboard, Session 1
45
Consumers’
Surplus
40
Price of Cardboard Rectangles
Click through
to see what
this model
predicts [1]
price and
quantity,
[2]surpluses
of all
consumers,
[3] profits of
all sellers, and
[4] total
profits and
surpluses to
all market
participants to
be. First we
construct the
demand and
supply curves
from the
schedules
developed on
the previous
two slides.
Recall the
questions
posed.
($40-$20) x 5
35
= $100
30
Pricee = $20
25
Quantitye = 8
20
Sellers’ Profits
15
($20-$10) x 8
10
= $80
5
0
5
10
15
Quantity of Cardboard Rectangles
20
Total Profits
= $100 + 80
= $180
Homework Problems.
Now it is your turn to do some analysis. I will walk you
through, question by question.
Submit your answers by e-mail (wfeagin@templejc.edu).
When typing your answers, be sure to indicate the
numbers of the questions you are answering. For example:
1. My answer to Q1
2. My answer to Q2.
3. My answer to Q3.
….and so on.
There are 37 questions to be answered in this assignment
(Q1-Q37).
Use the information provided in Table 1 for Sessions 2 & 3 to answer the following questions
(click through) and complete the demand schedule for Sessions 2 & 3:
If the price for cardboard was above $40, how many of our 13 demanders would be willing to buy?
Q1
If the price for cardboard was exactly $40, how many of our 13 demanders would be indifferent to buying? Q4
If the price for cardboard was exactly $20, how many of our 13 demanders would be indifferent to buying?
Q5
If the price for cardboard ranged between $20 and $40, how many of our 13 demanders would be willing to buy?
If the price for cardboard was less than $20, how many of our 13 demanders would be willing to buy?
Q3
Sessions 2 & 3
Demand Schedule
Price Range
Amount Demanded
P > $40
Q6
$20 < P < $40
Q7
P < $20
Q8
Q2
Use the information provided in Table 1 for Sessions 2 & 3 to answer the following questions
(click through) and complete the supply schedule for Sessions 2 & 3:
If the price for cardboard was less than $10, how many of our 14 sellers would be willing to sell?
Q9
If the price for cardboard was exactly $10, how many of our 14 sellers would be indifferent to selling? Q12
If the price for cardboard was exactly $30, how many of our 14 sellers would be indifferent to selling? Q13
If the price for cardboard ranged between $10 and $30, how many of our 14 sellers would be willing to sell?
If the price for cardboard was more than $30, how many of our 14 sellers would be willing to sell?
Q11
Sessions 2 & 3
Supply Schedule
Price Range
Amount Supplied
P < $10
Q14
$10 < P < $30
Q15
P > $30
Q16
Q10
Figure 2: Supply & Demand for Cardboard, Sessions 2 & 3
Consumers’
Surplus
45
40
Price of Cardboard Rectangles
Click through
to see what
this model
predicts [1]
price and
quantity,
[2]surpluses
of all
consumers,
[3] profits of
all sellers, and
[4] total
profits and
surpluses to
all market
participants to
be. I’ll draw
the graph, but
you have to
answer the
questions.
(Q19-Q20) x
Q21
35
= Q22
30
Pricee = Q17
25
Quantitye =
Q18
20
Sellers’ Profits
15
(Q23-Q24) x
Q25
10
= Q26
5
0
5
10
15
Quantity of Cardboard Rectangles
20
Total Profits
= Q27 + Q28
= Q29
Market Efficiency
Economists are mainly interested in the efficiency of market outcomes. A
market outcome is said to be efficient if the sum of all profits made by
participants in the market is as large as possible. A market outcome is
inefficient if some other possible arrangement of trades will result in higher
total profits/surpluses for the market. If one set of institutional arrangements
leads to an inefficient outcome, it may be possible find alternative
institutions that generate higher total profits/surpluses.
In our experimental market, market efficiency is the actual total profits of
market participants expressed as a percentage of the highest possible amount
of profits that could be achieved in the market. If the total profits actually
made by market participants are equal to the maximum possible amount,
then the market is said to be 100% efficient. If the total profits actually
made are only 80% of the maximum possible amount, then the market is
said to be 80% efficient, and so on.
What were the actual total profits/surpluses of all market participants in
Session 2? Q30 [see Table 2]
What were the maximum possible profits in Session 2 & 3? Q31 [see
Figure 2]
How efficient was the experimental market outcome in Session 2
[express as a percentage]? Q32
What were the actual total profits/surpluses of all market participants in
Session 3? Q33 [see Table 2]
How efficient was the experimental market outcome in Session 3
[express as a percentage]? Q34
Finally, economists contend that in markets where the profits of buyers
and sellers depend only on the trades that they themselves make,
competitive equilibrium is the most efficient outcome. We may state
this important result as a proposition:
• Proposition: The sum of profits/surpluses of sellers and buyers in
competitive equilibrium is at least as large as it would be with any
other arrangement of trades.
Do you find that this proposition is supported by the outcomes in
Sessions 2 & 3 of our experimental market? Do not simply answer
“yes” or “no.” Elaborate on your answer. Q35
What do you believe the premise underlying the proposition stated above
to be? What assumption does the proposition make about a market
economy? Elaborate on your answer. Q36
What do our experimental outcomes imply about the role of government
in a capitalist economy? Elaborate on your answer. Q37