Journals for Experiments
Journal 1/2/3
Journal 1
1. The date of the experiment
July 1st, 2013
2. The title of the experiment
Pit Market
3. The structure of the experiment
It was a 5-round game. 24 students were divided into two groups, in which 12 were sellers
and the other 12 were buyers. The game began when they created a perfect competitive
market, called pit market, where sellers and buyers could negotiate for a trade. At the
beginning of each round, each seller was given a card with a number (always 2 or 8, and
the probability for each number is equal) randomly to decide how much their productions
valued. Similarly, buyers held a card (always 4 or 10, and the probability for each number
is equal) to decide how much money they had in the single round. Then the sellers and the
buyers were asked to trade with each other.
The sellers and the buyers negotiated to decide the price of the trade, and the seller’s
revenue came from the difference between the value and the price. Similarly, buyer’s
revenue was the difference between the money and the price.
As a buyer, if I got ＄10, I have to negotiate with a potential to make the Price low as
much as possible, to gain biggest revenue. If I got ＄4, unfortunately, my only goal was to
find a seller holding a value of ＄2, and to try my best to persuade him to trade with me at
a price between ＄2 to ＄4. The sellers, on the other hand, had the opposite idea about the
trade. They would like to reach an agreement on a possibly higher Price.
When a couple of seller and buyer reached an agreement, the trade happened. A single
trade only happened between one seller and one buyer, so my decision didn’t interact with
other participants’ in determining my payoffs. However, since every round had a time
limiting of 5 minutes, whether to make decisions soon might influence the payoffs, for
example, if a buyer holding ＄10 spent a lot of time on making the final decision, he might
find there was no seller with a value of ＄2 for him. Unfortunately, he had to trade with a
seller with a value of ＄8, or no suitable trade until the bell rings.
4. The theory the experiment was designed to test
A general equilibrium theory was tested in this experiment. The equilibrium lay where the
quantity for demand was equal to the quantity for supply. This equilibrium was often found
in a perfect competitive market, where sellers and buyers were assumed to be rational.
Only in the equilibrium, the market ran efficiently, and the total surplus of buyers and
sellers could get to its largest.
However, non-rational behaviors could appear in the pit market, since someone made some
clownage intentionally. Their purpose was not to gain as much profits as possible but to
mass the market and to confuse others’ decisions. They might not behave in a manner of
equilibrium predictions, therefore, the results sometimes came out with unexpectation.
5. Summary of the results
Actually, when we drew a graph of supply curve and demand curve, we easily got an
equilibrium interval of quantity, which was 4 to 8. In this equilibrium, only half of the
sellers and buyers could get involved in a trade. We compared the total surplus in two
models.
In the first model, it was in equilibrium. We assumed the price was ＄6, and only 6 sellers
and 6 buyers had trade:
Total surplus=[(＄10-＄6)+(＄6-＄2)]*6=＄48
In the second model, it was in disequilibrium. We assumed the price was ＄3 and ＄9, and
all the sellers and buyers could have trade:
Total surplus=[(＄10-＄9)+(＄9-＄8)]*6+[(＄4-＄3)+(＄3-＄2)]*6=24
Obviously, the first total surplus was larger than the second one, making the first market
more efficient. By the way, the first result was more likely to be found in the real market.
When having a quick look at the consequence, we could easily find that disequilibrium
happened occasionally. In round 1, there were four outcomes of disequilibrium out of
seven trades. As the round goes, disequilibrium decreased. The best reason, I suppose, to
explain the disequilibrium was the human’s unexpected behaviors. In the game, some
buyers convinced the sellers of a successful trade by constant persuasion, mentioning
friendship, relationship of classmates, and any possible benefits sharing. Finally they made
the trade happen, although it was disequilibrium.
Economists often found that some theories were incorrect in a real market, like the result
of Pit Market. It’s normal, I suppose, because predicting human behaviors is the hardest
task around the global. Human always have complex ideas to guide their actions, and ideas
could change any time. Moreover, any possible hysteretic transmission of information
could break the equilibrium at once.
6. My decisions and experience (Buyer)
In round 1, I got ＄4. I didn’t know how much the sellers exactly got, but through the
blackboard (actually it’s white), I found a range of price went from ＄3 to ＄9. I could
make a trade at ＄3, but it didn’t happened. Maybe it’s because of my weakness of
negotiating and bargaining. I would try again in round 2.
In round 2, I got ＄4 again. I tried to find some seller to offer me at the price less than ＄4,
but failed. I thought about the numbers on the blackboard and the negotiation with some
seller holding a high price, I found the result normal. Someone could trade, while someone
