Introductory to Microeconomics
Solution of case study 2.2
Does equilibrium exist?
Suggested answers
1. Suppose that groups of buyers and sellers participate in the same double oral auction as in Vernon
Smith’s experiment. After 5 rounds with demand and supply as shown in Figure 1, the same group
of buyers and sellers trade for 5 more rounds, but the buyers are assigned new values from the
demand curve in Figure 2.2.2 and the suppliers are assigned new values from a supply curve that
extends from $1.50 to $4.25 instead of from $0.75 to $3.50 (as in Figure 2.2.2). What would be your
prediction about the average prices at which trade occurs over the extra 5 rounds?
In this situation there is the same market demand schedule and a revised market supply schedule.
The equilibrium will now be for 4 units to be traded and the price to be between $2.25 and $2.50.
(That is, at any price between $2.25 and $2.50 there will be 4 buyers and 4 sellers who can engage in
mutually advantageous trade.) Given the results from the experiment described in the case study,
we’d expect that the average price should converge to the equilibrium price – between $2.25 and
$2.50. However, this may take a little time to occur. We might expect that, with buyers and sellers’
behaviour initially being conditioned by demand and supply conditions in the first 5 rounds, the
average price might begin at a price close to $2. However at this price it’s likely that there will be
less trade than in the first 5 rounds – Suppliers’ reservation prices have increased so there will be less
suppliers willing to trade at this price. Hence buyers will be induced to start offering higher prices in
order to draw greater supply onto the market. Over a couple of rounds this should shift the average
trade price to within the equilibrium range, and at the same time the quantity traded will increase to
the new equilibrium quantity.
2. Suppose that groups of buyers and sellers participate in the same type of double oral auction as in
Vernon Smith’s experiment. The only difference is that sellers are given the exclusive right to
propose prices at which trade can occur, and buyers are only able to accept or reject to trade at the