Some Possible Variations for the Experiments

Here are a few modifications for some of the experiments. These variations in the experimental procedures either allow smoother operation or result in some additional interesting behavior.

Part I: Competitive Markets

• Experiment 1: Supply and Demand
  • If you want to lessen the demands on the students, only record the data for the last round of each session and do not require them to calculate standard deviations. They should then be instructed to ignore questions that reference the "first round" or standard deviation in the lab report and home work.

• Experiment 2: Shifting Supply and Demand

Part II: Market Intervention and Public Policy

• Experiment 3: Sales Taxes
  • Table H3.4, p 119: You may want the students to add a row for when the tax rate is $0 (for completeness).

• Experiment 4: Prohibition

• Experiment 5: Minimum Wages

Part III: Imperfect Markets

• Experiment 6: Externalities
  • The following modifications to the procedure described in the Instructor's Manual will make Session 3 (Marketable Pollution Permits) run more smoothly. This session can be challenging, since it requires equilibration in two interdependent markets (of course, this also presents an opportunity for you to discuss the basic idea of general equilibrium).
    • Require that all transactions (both permits and ornaments) be immediately reported to, and posted by, the market manager.

    • Allow pollution permits to be sold more than once, but do not allow any person in the market to hold more than one permit at a time. Any time a sale occurs, the new buyer should write his/her ID and the sales price on the permit.

      You may want to modify the permits to look like the following:

      --------------------------------------------------------------
                     ***POLLUTION PERMIT***
      --------------------------------------------------------------
      
      Original Owners's ID:________
      
      Owner's ID:_________  Price Paid: _________
      
      Owner's ID:_________  Price Paid: _________
      
      Owner's ID:_________  Price Paid: _________
      
      Owner's ID:_________  Price Paid: _________
      
      Owner's ID:_________  Price Paid: _________
      
      --------------------------------------------------------------
      

      Alternatively, you can just tell the students to write any new owner's IDs and prices, in order, on the back of the permits.

      When reporting the price of the permits in the data, just use the price of the last sale.

    • You should designate a small area of the room as the "Permit Pit," and require all trading of permits to occur in that area. Again, all permit sales should be immediately reported to, and posted by, the market manager.

    • Encourage the students to first spend time in the permit market and only then enter the ornament market.

    • Ornament sales will happen slowly, but make sure that the prices of the first few ornaments are quickly reported and posted.

    • You should find that initially there is a lot of activity in the permit market, and only a trickle of ornament sales. This is a good pattern to encourage. After this initial period, the markets tend to clear quickly.

    • Try your best to make sure everyone knows the prices that are emerging from the market (especially during the first few minutes).

  • Increasing the externality cost from $15 to $30 will make this lab more interesting since it will result in the market without interference having a negative total profit. If you make this change, you need to also make four other changes: (1) each person in the market pays $30/t, where t is the total number of participants (previously this was $15/t), (2) the tax rate in Session 2 needs to be increased to $30 per transaction (previously it was $15), (3) the number of permits you issue in Session 3 should only be 2N, where N is the number of complete 12-packs you distribute (previously it was 3N), and (4) you should still give the permits to types 5, 8, and 11, but there will be more of these types than available permits so you may want to rotate which of these folks get permits during each session.

• Experiment 7: Monopolies and Cartels
  • Although the experiment works with the distribution procedure described in the Instructor's Manual, you can make the outcome more interesting (by having the monopolistic outcome have lower quantity supplied and a dead-weight loss) if you make the following modifications:

    Materials:

    • Make ordered six-packs of Personal Information Sheets of Types A,B,C,D,E,E. (Note: Each six-pack contains two Type E sheets.) Make enough six-packs so you have at least one sheet per potential student.

    • Make six extra Type E sheets.

    Distribution Procedure:
    • Give one of the extra Type E sheets to the first student.

    • Then, distribute as many complete six-packs of Personal Information Sheets as you can. Give Type E sheets to the remaining Students.

    As per the instructions, when you run the experiment and need to pick sellers, pick only one student of each type (A-E), resulting in five sellers.

    If you follow this procedure, you will have the following buyer types in the sessions:

          Sessions 1 and 2
    
    Buyer Type            Number
    
    High-Value ($21)      4N-2+K
    Low-Value ($16)       2N -2
    

    where N is the number of complete six-packs distributed, and K is the number of additional Type E sheets distributed (not counting the one that was given to the first student).

          Sessions 3 and 4
    
    Buyer Type                     Number
    High-Value Student ($21)       N-1
    Low-Value Student ($16)        2N-2
    High-Value Non-Student ($21)   3N-1+K
    Low-Value Non-Student ($16)    0
    

    where N is the number of complete six-packs distributed, and K is the number of additional Type E sheets distributed (not counting the one that was given to the first student).

Part IV: Firms and Technology

• Experiment 8: Entry and Exit

• Experiment 9: Measuring Productivity

• Experiment 10: Comparative Advantage

Part IV: Information, Auctions, and Bargaining

• Experiment 11: Adverse Selection
  • In Session 4, rather than having 1/2 good cars and 1/2 lemons, use the same distribution that you had in Session 3 (1/3 good and 2/3 lemons)--in fact, you may want to just keep the used-car owners the same in both Session 3 and 4 (and, to save time, just distribute the car quality tags to the owners when you assign them their car quality in Session 3). Under this modified procedure, the demonstration of the value of full information is much more dramatic, since under Session 3 only lemons will be sold, while under Session 4 all cars will be sold (thus resulting in a much higher total profits and market efficiency). If you use the old procedure, the comparison between Session 2 (where, a likely outcome is all cars being sold) and Session 4 (with, again, all cars being sold but at different prices) is much less interesting as total profits are identical (even though the distribution of these profits between buyers and sellers is different).

  • Page 323: You may want to add the following question (especially if you modify the distribution procedure in Session 4 as described above): In Session 3, the total amount of net profit earned by used-car owners who sold their cars on the market was _____, the total amount earned by dealers was ____, and the total profit earned by both was _______. In Session 4, the total amount of net profit earned by used-car owners who sold their cars on the market was _____, the total amount earned by dealers was ____, and the total profit earned by both was _______.

• Experiment 12: Auctions

• Experiment 13: Bargaining