6/23/2016Senior Seminar1 Markets, Competition and Efficiency Competition Commission of India Delhi, January 7, 2010

6/23/2016Senior Seminar2 A Simple Problem of Society There are many people in society Some can produce and want to sell –different people produce at different costs Others want to buy and consume –different people attach different values to the good

6/23/2016Senior Seminar3 Questions to Answer How should we decide: –Who should produce and sell? –Who should buy and consume? –What should be the price associated with the transfer from the producer to the seller?

6/23/2016Senior Seminar4 Try Two Methods We shall take a simple example of the problem And try to solve it by two methods I need two volunteers

6/23/2016Senior Seminar5 Volunteers’ Work The volunteers will take this description of the problem Go outside to solve the problem written this paper They have 30 minutes to solve the problem and return to this room

6/23/2016Senior Seminar6 All Others Will Stay The rest of us shall play a market game Let me describe the market game People to my left will be buyers People to my right will be sellers

6/23/2016Senior Seminar7 Organization of the Market Game Description Instructions Game Review and analysis Payoff

6/23/2016Senior Seminar8 Description of the Market Game Market will be conducted in several periods Trade an imaginary good (e.g., potato or wheat, etc.) Trade according to the specified rules Try to earn as many points as you can

6/23/2016Senior Seminar9 Instructions for Buyers Each buyer given a sheet of paper with your value on the top of your sheet (value is private, not to be shared with others) You may buy one unit each period If you buy at a price below your value, the difference is your profit = value – price You incur a loss by buying above value

6/23/2016Senior Seminar10 Buyer Sheet ID:5 Period ___________ Value 2,300 - Purchase Price _____ = Profit ___________

6/23/2016Senior Seminar11 Instructions for Sellers Each seller is given a sheet of paper with your cost on the top of your sheet (cost is private, do not share with others) You may sell one unit each period If you sell at a price above your value, the difference is your profit = price - cost You incur a loss by selling below cost

6/23/2016Senior Seminar12 Seller Card ID: 6 Period ___________ Sale Price __________ - Cost 1,200 = Profit ___________

6/23/2016Senior Seminar13 Rules of the Market Each buyer can buy one unit in each period Each seller can sell one unit in each period You do not have to enter into a transaction Calculate your profit and write down on your sheet

6/23/2016Senior Seminar14 Rules for Buyers Any buyer can raise his/her hand and propose to buy by saying –His/her ID number –“bids” –Price you are willing to pay for one unit For example: “5 bids 100” This means that buyer number 5 is willing to pay a price of 100 points to buy one unit of the good

6/23/2016Senior Seminar15 Rules for Buyers If there is already a bid on the board, your bid has to higher in order to be valid A bid cannot be withdrawn Any seller can accept your bid at any time by raising hand and saying, e.g., “12 accepts 100”

6/23/2016Senior Seminar16 Rules for Sellers Any seller can raise his/her hand and propose to sell by saying –His/her ID number –“asks” –Price you are willing to accept for your good For example: “12 asks 200” This means that seller number 12 is willing to sell one unit for a price of 200 points

6/23/2016Senior Seminar17 Rules for Sellers If there is already an ask on the board, your ask has to lower in order to be valid An ask cannot be withdrawn Any buyer can accept your ask at any time by raising hand and saying “5 accepts 200”

6/23/2016Senior Seminar18 Please Remember Secret of success in trading Buy above value  loss Sell below cost  loss Keep information on your sheet to yourself Negotiate to the best of your ability (trading lasts for 5 minutes each period) You do not have to trade if you can’t make money

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6/23/2016Senior Seminar20 Buyer Values

6/23/2016Senior Seminar21 Seller Costs

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6/23/2016Senior Seminar29 What Does This Mean? We know about laws of natural sciences Social sciences also have laws that can predict and help understand what we do You have just seen the power of one such basic law from economics Carefully designed experiments can help us refine the economic science by sorting out theories by the robustness and predictive ability