Instructions

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Instructions	
  –	
  Experiment	
  2	
  
This	
  experiment	
  goes	
  over	
  10	
  rounds.	
  In	
  each	
  round,	
  participants	
  are	
  randomly	
  matched	
  to	
  
groups	
  of	
  five.	
  That	
  means	
  that	
  in	
  each	
  round	
  you	
  will	
  interact	
  within	
  a	
  different	
  group	
  of	
  
participants.	
  The	
  experiment	
  is	
  computerized.	
  You	
  make	
  all	
  your	
  decisions	
  at	
  the	
  computer.	
  	
  
In	
  each	
  round	
  every	
  of	
  the	
  five	
  participants	
  represents	
  a	
  souvenir-­‐selling	
  company.	
  All	
  
companies	
  are	
  selling	
  their	
  Sydney	
  Opera	
  souvenir	
  on	
  the	
  same	
  market	
  right	
  before	
  the	
  
Opera.	
  These	
  souvenirs	
  are	
  very	
  homogenous,	
  i.e.	
  they	
  look	
  exactly	
  the	
  same,	
  and	
  have	
  all	
  
exactly	
  the	
  same	
  quality.	
  Also,	
  all	
  companies	
  have	
  the	
  same	
  production	
  costs	
  for	
  one	
  
souvenir,	
  E$	
  0.26.	
  Each	
  company	
  can	
  produce	
  up	
  to	
  600	
  souvenirs	
  per	
  round.	
  All	
  companies	
  
could	
  sell	
  as	
  many	
  souvenirs	
  as	
  they	
  like	
  to	
  an	
  overseas	
  company,	
  which,	
  however,	
  would	
  
only	
  pay	
  E$	
  0.26	
  per	
  piece.	
  
In	
  each	
  round	
  you	
  make	
  a	
  decision	
  about	
  the	
  price	
  at	
  which	
  you	
  want	
  to	
  offer	
  your	
  
souvenir.	
  At	
  the	
  same	
  time	
  the	
  four	
  other	
  participants	
  in	
  your	
  market	
  also	
  make	
  a	
  price	
  
offer.	
  Each	
  company	
  can	
  ask	
  for	
  a	
  price	
  of	
  either	
  E$0.30,	
  E$0.40,	
  E$0.60,	
  E$0.80,	
  or	
  E$1.00.	
  
The	
  tourists,	
  the	
  consumers	
  in	
  the	
  market,	
  are	
  simulated	
  by	
  the	
  computer.	
  The	
  tourists	
  
observe	
  the	
  price	
  offers,	
  and	
  then	
  make	
  a	
  decision	
  whether	
  they	
  want	
  to	
  buy	
  the	
  souvenir,	
  
and	
  if	
  they	
  want	
  to	
  buy,	
  from	
  which	
  company.	
  Specifically,	
  there	
  are	
  600	
  tourists	
  who	
  come	
  
by	
  in	
  each	
  round.	
  120	
  tourists	
  would	
  buy	
  a	
  souvenir	
  if	
  the	
  price	
  were	
  E$	
  0.30	
  or	
  less.	
  A	
  
further	
  120	
  tourists	
  would	
  buy	
  if	
  the	
  price	
  were	
  E$	
  0.40	
  or	
  less.	
  Another	
  120	
  tourists	
  would	
  
buy	
  up	
  to	
  a	
  price	
  of	
  E$	
  0.60,	
  but	
  not	
  if	
  the	
  price	
  is	
  higher.	
  Further	
  120	
  tourists	
  would	
  buy	
  if	
  
the	
  price	
  were	
  E$	
  0.80	
  or	
  less.	
  And	
  the	
  last	
  bunch	
  of	
  tourists	
  would	
  buy	
  up	
  to	
  a	
  price	
  of	
  E$	
  
1.00.	
  No	
  tourist	
  would	
  buy	
  if	
  the	
  price	
  is	
  larger	
  than	
  E$	
  1.00.	
  
When	
  the	
  tourists	
  come	
  to	
  the	
  market	
  and	
  observe	
  the	
  prices,	
  all	
  of	
  them	
  of	
  course	
  will	
  go	
  
to	
  the	
  outlet	
  of	
  the	
  company	
  with	
  the	
  lowest	
  price	
  of	
  all,	
  and	
  buy	
  there.	
  If	
  there	
  are	
  more	
  
than	
  one	
  company	
  with	
  the	
  lowest	
  price,	
  tourists	
  will	
  split	
  equally	
  among	
  the	
  companies	
  
with	
  the	
  lowest	
  price	
  and	
  buy	
  there.	
  Thus,	
  the	
  companies	
  with	
  the	
  lowest	
  price	
  will	
  share	
  a	
  
demand	
  from	
  600	
  tourists	
  if	
  this	
  lowest	
  price	
  is	
  E$	
  0.30,	
  and	
  a	
  demand	
  from	
  480,	
  360,	
  240,	
  
and	
  120	
  tourists	
  if	
  this	
  lowest	
  price	
  is	
  E$0.40,	
  E$	
  0.60,	
  E$	
  0.80,	
  and	
  E$	
  1.00,	
  respectively.	
  
In	
  sum,	
  your	
  profit	
  in	
  each	
  round	
  will	
  be	
  	
  
P	
  *	
  N	
  –	
  0.26	
  *	
  N	
  
=	
  (P	
  –	
  0.26)	
  *	
  N	
  
with	
  P	
  the	
  price	
  you	
  named,	
  and	
  N	
  the	
  number	
  of	
  tourists	
  who	
  will	
  buy	
  at	
  your	
  outlet	
  for	
  
this	
  price.	
  (As	
  you	
  can	
  sell	
  all	
  of	
  your	
  unsold	
  products	
  to	
  the	
  overseas	
  company	
  with	
  zero	
  
profit,	
  they	
  don’t	
  play	
  a	
  role	
  here).	
  
Any	
  questions?	
  



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File Type Extension             : pdf
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PDF Version                     : 1.3
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Page Count                      : 1
Title                           : Microsoft Word - lec02_experiment02_sim_price_competition.docx
Author                          : Ben Greiner
Producer                        : Mac OS X 10.7.5 Quartz PDFContext
Creator                         : Word
Create Date                     : 2013:03:06 12:07:11Z
Modify Date                     : 2013:03:06 12:07:11Z

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