McMaster
Experimental Economics Laboratory
Single-trader Market Power in Double Auctions for Emissions Permits
R. Andrew Muller, McMaster University
Stuart Mestelman, McMaster University
John Spraggon, Lakehead University
Rob Godby, University of Wyoming
Subject Instructions
You are participating in an experiment in economic decision making.
In this session, you will participate in FOUR markets, one practice market
and three real markets. The practice market will continue for two or three
periods. The real markets will continue for 10 periods each. You will be
paid for your participation. The amount you receive will depend on the
decisions you and the other participants make during the real markets.
You will be paid in cash at the end of the session.
In each market you represent a firm which uses several inputs to produce
a product. One of the inputs, called leets, is very scarce and the
government has decided to ration it. It has distributed a number of ration
coupons.
Each coupon allows you to use one unit of leets.
Each period you receive revenues from selling your product and incur
costs from purchasing inputs. The difference between your revenues and
the cost of all inputs except leets is called your net sales
revenue. It may be positive or negative.
Every unit of leets you use reduces your costs. The sum of this cost
saving and your net sales revenue is your total operating profits.
This can be shown in a table.
| Units of Leets |
Coupons Required |
Net Sales Revenue
(cents) |
Total Operating Profit
(cents) |
Redemption Value of this Coupon
(cents) |
Total Value of Coupons
(cents) |
| 0 |
0 |
300 |
300 |
0 |
0 |
| 1 |
1 owned |
300 |
550 |
250 |
250 |
| 2 |
2 owned |
300 |
700 |
150 |
400 |
| 3 |
3 |
300 |
750 |
50 |
450 |
Please note that this table is only an example. The numbers in the experiment
are quite different.
The table shows that using one coupon (rather than none) raises operating
profits from 300 cents to 550 cents, that is by 250 cents. Accordingly,
we say that the redemption value of the coupon is 250 cents. Similarly,
the redemption value of the second coupon is 150 cents and the redemption
value of the third coupon is 50 cents.
Please answer the following two questions , writing your answer in the
space provided. When you are finished, raise your hand so I may check your
work.
1. Suppose that you own two coupons (shown as "owned"). What is the
most
money that you be willing to pay for one more coupon?
Answer: ____________________
2. Suppose that you own two coupons (shown as "owned"). What is the
least
amount of money that you should accept in return for selling one coupon.
Answer: _________________________.
Trading Coupons
In this session, some participants will be given some shares. Each
share entitles that participant to one coupon at the beginning of each
period.
These participants can
-
keep their coupons to increase their operating profit
-
buy more coupons to increase their operating profit even further, or
-
sell one or more of the coupons that they own.
Their profit for the period will be
-
the money received for any coupons they sell while trading
-
less the money paid for any coupons they buy while trading
-
plus the redemption value of the coupons they hold at the end of the period,
-
plus their net sales revenue (which may be negative)
Other participants will not have any shares, so they will not own any coupons
at the beginning of the period. These participants can choose to buy coupons.
Once they have bought one or more coupons, they can use them
-
to increase their operating profits or
-
to sell to another participant.
Their profit for the period will be
-
the money received for any coupons they sell while trading
-
less the money paid for any coupons they buy while trading
-
plus the redemption value of the coupons they hold at the end of the period,
-
plus their net sales revenue (which may be negative)
The Double Auction Market
You will have the opportunity to buy and sell coupons in a computerized
double auction market. In this market you can offer to buy a coupon for
a certain amount. This is called a bid. You can offer to sell a
coupon for a certain amount. This is called an ask. Finally, you
can purchase a coupon by paying the price someone has asked
or you can sell a coupon for the price someone has bid.
Practice Market
We will now demonstrate how this market works by working through a practice
market. Please follow the experimenter's instructions as he leads you through
the following steps. Please do not begin any step before being asked. Please
raise your hand if you have any questions during the practice market.
You will not be paid for the results of this practice market.
-
Please wait for us to bring up a program on your computer screen. You will
see a welcome screen.
-
When instructed, press a key to bring up the login screen. Enter
your name, student number and telephone number
-
When instructed, press the space bar. Eventually the Start of Period
1
screen will appear. Note that coupons have not yet been distributed. You
all have 3 shares, 0 coupons, and 0 cash.
-
When instructed, push F4 to open the Resale Values window. This shows the
redemption values of each coupon you might acquire. These values are like
the Redemption Values in the Table on page 1.
-
When instructed, push ESC to exit from the Resale Values window. Push F10
to start the distribution of coupons for this period. A message will inform
you how many coupons you have received. Note that your inventory is updated.
You now have 3 coupons.
-
When instructed, press any key to bring up a blue menu bar. Press F4 to
view the resale values again. Notice that the coupons you own are flagged
as "owned".
-
The experimenter will ask you how your operating profits will change if
you buy or sell one more coupon.
-
The experimenter will ask you how your operating profits will change if
you buy or sell one more coupon., push ESC and F10. The wizard screen
will
appear. The wizard knows your redemption value schedule. It calculates
how much your operating profit will change if you buy or sell one more
coupon. Note that the wizard will update its advice every time you buy
or sell a coupon.
-
The experimenter will ask you to use the information from the wizard.
-
When instructed, press a key to open the primary coupon trading
market. The experimenter will ask you to make bids, asks, sales, and
purchases.
-
You will receive a message period is over. When instructed, push any key
to bring up the Production Screen. This screen reports the number
of coupons you will redeem this period and how much you will earn. In this
session, you must redeem all your coupons.
-
When instructed, push the keys to start the next trading period.
-
When instructed, continue trading in the practice market.
-
You will be told when the practice market is now over. Please notice the
final payoff screen. This tells you how much you have earned in this market.
You will not be paid for this market. However, for the next three markets,
you will be paid the amount shown on the screen. Please note that the conversion
rate is 1 Canadian cent for every unit of "cash" that you hold at the end
of the market.
Trading for Keeps
This completes your training . We will now begin the main part of the session.
This part of the session consists of three markets. Each market will last
for 10 periods. During these 10 periods your redemption values will not
change. After each of the first two phases we will restart the computer
program with a different set of redemption values. Your final payoff will
be the sum of your earnings in each of these three markets.
In your folders you will find a Payoff Record form. Please record
your earnings from each of the three real markets on it. The total is the
amount of money (in Canadian cents) that will be paid to you at the end
of the session.
Remember that in this session, all bids, asks, purchases and sales are
conducted in Canadian cents. Your inventory of cash represents the number
of real Canadian cents you have earned during the session.
Market Structure
There are ten participants in this session. During one or two markets,
all ten participants will be active. During the other one or two markets,
four of the participants will receive such low redemption values that they
will be "shut out" of the market. They will not be able to buy or sell
coupons. They will continue to earn profits from their net sales revenues.
Even if you have been left out of the market you will need to follow
the instructions on the screen at the beginning and end of each trading
period. During the trading you may observe the trading activity or read
a book.
Final Instructions
Do not speak with any other participant during the session.
If you have any questions, please raise your hand. The experimenter
or a helper will speak with you privately.
End of Instructions
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