6/1/2016Senior Seminar1 Markets, Competition and Efficiency Kozminski University Warszawa, June 22, 2013

6/1/2016Senior 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 same goods

6/1/2016Senior 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? –We shall try to solve the problem

6/1/2016Senior 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

6/1/2016Senior 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

6/1/2016Senior Seminar6 Market Game We 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

6/1/2016Senior Seminar7 Organization of the Market Game Description Instructions Game Review and analysis Payoff

6/1/2016Senior 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

6/1/2016Senior 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

6/1/2016Senior Seminar10 Buyer Sheet Double Auction Period _____ Buyer ID71Name Value 10,000 - PRICE Paid = Profit If you pay a price higher than your value, you have a loss.

6/1/2016Senior 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

6/1/2016Senior Seminar12 Seller Card Double Auction Period _____ Seller ID172Name Price Received - Cost 8,500 = Profit If you sell at a price below cost, you have a loss.

6/1/2016Senior 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 buyer/seller sheet, and your profit sheet.

6/1/2016Senior Seminar14 Rules for Trading (Open Outcry) Buyer are free to speak to any seller (and sellers are free to speak to any buyer) to negotiate a price at which both are willing to transact. You are free to speak to, and bargain with any number of persons from the other side of the market. Once you agree on a transaction, write down the transaction price, the name and number of the counterparty on your sheet, calculate your profit, and hand in your sheet to the assistants. Also write this information on your profit sheet., and

Rules for Trading (Double Auction) Any buyer is free to state his/ her ID and bid a price at which he/she wishes to buy a unit. If there is an existing bid on the board, this bid must be higher to be valid. Once announced, a bid cannot be withdrawn. Any seller who wishes can accept your bid which will complete a transaction between the buyer and the seller and they should record their transaction, profit, and withdraw from the market for the period. Each transaction cancels any unaccepted bids and asks on the board. 6/1/2016Senior Seminar15

Rules for Trading (Double Auction) Any seller is free to state his/ her ID and ask a price at which he/she wishes to sell a unit. If there is an existing ask on the board, this ask must be lower to be valid. Once announced, an ask cannot be withdrawn. Any buyer who wishes can accept your ask which will complete a transaction between the buyer and the seller and they should record their transaction, profit, and both withdraw from the market for the period. Each transaction cancels any unaccepted bids and asks on the board. 6/1/2016Senior Seminar16

6/1/2016Senior Seminar17 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”

6/1/2016Senior Seminar18 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

6/1/2016Senior Seminar19 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”

6/1/2016Senior Seminar20 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 After completing your one trade, please retire to one side of the room so others can trade

6/1/2016Senior Seminar21 Buyer Values

6/1/2016Senior Seminar22 Seller Costs

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6/1/2016Senior Seminar34 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

What about the Problem? What did you do in the game? Many ways of looking at it. You were focused on making profit for yourself. Some made more profit than others (bargaining skills, strategy, and the values and costs given to you on your cards). But what happened to the total profit of all members of the class? 6/1/2016Senior Seminar35