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?%
