The Double Auction

Summary

This economic experiment, a double oral auction, demonstrates how the supply and demand model works in practice. Buyers and sellers are given different marginal benefits and costs, and transactions occur when both agree on a price. The auction aims to show if the model's predictions about the number of transactions and the price range hold true. After conducting the auction, the results align closely with the supply and demand model, confirming its accuracy. The market results in eight transactions, with the price settling between $3 and $4, mirroring the model's predictions.

Takeaways

• 😀 The experiment uses a double oral auction to demonstrate how markets work and test the accuracy of the supply and demand model.
• 😀 In a double auction, both buyers and sellers call out prices, and transactions occur when they agree on a price.
• 😀 Buyers and sellers have private information about their marginal benefit and marginal cost, respectively, which drives their decision-making in the auction.
• 😀 The buyers' marginal benefit decreases as they purchase more items, while sellers' marginal costs rise with each additional item sold.
• 😀 Each buyer and seller's private information is kept confidential to maintain a competitive environment.
• 😀 The auction aims to determine whether the market outcome matches predictions based on supply and demand curves.
• 😀 The predicted outcome was that 8 items would be sold at a price between $3 and $4, based on the aggregated supply and demand curves.
• 😀 The actual market result was 8 units sold, with the price settling around $3.25, closely aligning with the prediction.
• 😀 The experiment showed that the supply and demand model can accurately predict real-world market behavior under controlled conditions.
• 😀 This experiment highlights the importance of market interactions between buyers and sellers in determining market prices and quantities.
• 😀 The auction setup, where buyers and sellers compete to make the best deals, mirrors real-world markets like stock and commodities exchanges.

Q & A

What is the main purpose of the double oral auction experiment described in the transcript?

The main purpose is to observe how buyers and sellers behave under market conditions and test whether the predictions made by the supply and demand model align with real market outcomes.

How does a double oral auction differ from a regular auction?

In a regular auction, only buyers call out prices, and the highest bid wins. In a double oral auction, both buyers and sellers actively call out prices, and a sale occurs when both agree on a price.

Why is it important for buyers and sellers to keep their information private in this experiment?

Keeping information private ensures that each buyer and seller makes decisions based on their own marginal benefit or cost without being influenced by others' strategies or pricing.

What does the marginal benefit table for a buyer represent?

The marginal benefit table shows the benefit or value that a buyer receives from purchasing each successive item. It decreases as more items are bought.

What is the significance of the marginal cost table for a seller in the experiment?

The marginal cost table for a seller indicates the cost of selling each additional item. It helps the seller determine the minimum price they are willing to accept for each item.

How do buyers and sellers decide on the price for a transaction during the auction?

Buyers make bids for the items they want to purchase, and sellers ask for a certain price to sell their items. A transaction occurs when a buyer's bid matches a seller's ask.

What is the predicted outcome of the auction based on the supply and demand model?

The supply and demand model predicts that 8 units will be traded at a price between $3 and $4.

What was the actual result of the auction, and how did it compare to the predicted outcome?

The actual result of the auction was 8 units traded, with the price settling at approximately $3.25, which closely matched the predicted price of $3 to $4.

What role do the auctioneer and assistant play during the experiment?

The auctioneer oversees the auction process, while the assistant records the bids and asks, marking transactions when an agreement is made between a buyer and a seller.

How does this experiment demonstrate the accuracy of the supply and demand model?

The experiment's results align closely with the predictions made by the supply and demand model, validating its ability to predict market outcomes such as price and quantity traded.