# Economics 201

## Problem Set #2: Double-Oral Auction Analysis

You have participated in two experiments using a double-oral auction market. The other section performed two experiments with a similar basic structure, but with different numbers. You are now to write a brief report interpreting the results of the experiments based on the economic theory of markets. You will probably want to focus on the experiments in which you participated, but you may also discuss the experiments performed by the other section (and you need to look briefly at them for question 4). This report is to be written in collaboration with a partner as assigned below. Each pair of lab partners should submit one report, which is due in class on the morning of Wednesday, September 15. The partner assignments should correspond to those assigned in class. If there are discrepancies, please let me know immediately. (If you are not listed on the partner sheet, you did not participate in the experiment. Email me for partner information.)

In preparing your analysis, you should consider the following questions:

1. What was the demand curve for widgets in each experiment by that group of participants designated as "buyers?" (Hint: This is to be derived from their given values, not from the results of the experiment.)
2. What was the supply curve for widgets in each experiment by that group of participants designated as "sellers?" (The above hint applies here as well.)
3. Given the demand and supply curves, what outcome in terms of quantity exchanged and price do you expect in each experiment based on the theory of competitive markets?
4. What pattern did the distribution of trading prices followed from the first trading period to the last? Is this what you would expect? Why?
5. How did the four experiments (two in each section) differ from one another? How would you expect these differences to affect the outcomes? Do you see these effects in the actual results?
6. How closely did the experimental market compare to the textbook paradigm of a competitive market, both in terms of assumptions and in terms of the actual prices and quantity exchanged that you observed? What were the principal similarities and differences?
7. Suppose that buyers and sellers with values and costs like those in the experiment were interacting in a market that achieved perfect competitive equilibrium (CE). In a CE, some buyers and sellers may choose not to undertake transactions, but all transactions that occur are at the same competitive equilibrium price. How much profit would each buyer and seller have earned (per period) in CE? What would have been the total profit to buyers and total profit to sellers (per period) in CE? How do those total "potential" profits for buyers and sellers compare to the total actual profits from exchange in the various periods of the experiments? (Note: It will take you a long time to calculate the profits from every period of every experiment. Select a few periods to work with at first and then go as far with this as you can/want to.)
8. In one experiment there may have been periods in which the price was restricted by a price control (ceiling or floor), in which sellers or buyers were urged to collude, or in which a tax was placed on buyers or sellers. Do the results you observe under these market distortions match those you expect based on economic theory? Explain.

#### Links to data values, experiment results, and partner assignments:

• Data values for double-oral auction (Excel spreadsheet)
• Results of Fall 2010 experiments (Excel spreadsheet)
• Partners for Problem Set #2 (pdf document)

Any questions or problems? parker@reed.edu