In Professor Vernon’s experiment, which “buyers” ended up with a surplus at the

Question

In Professor Vernon’s experiment, which “buyers” ended up with a surplus at the market-clearing price of $2?

Which “sellers” had a surplus?

Which “buyers” or “sellers” did not engage in transactions?

Information Economy ERIMENTAL ECONOMICS Economists have limited opportunities to carry out ntrolled experiments available in the physical and biological sciences. But ades ago, Professor Vernon Smith began some experiments to see how and efficiently a group of test subjects could achieve market equilibrium. His d 22 students, 11 designated as "buyers" and 11 as "sellers Each buyer was given a card indicating the value of purchasing one unit of a hypothet cal commodity; these values ranged from $3.25 down to $0.75, forming a downward sloping demand curve. Each seller was given a card indicating the cost of supplying one unit of that commodity; these costs ranged from $0.75 up to $3.25, forming an upward- sloping supply curve. Each buyer and seller knew only what was on his or her own card in of co original experiment involve To provide incentives, participants were told they would get a cash bonus at the end of the experiment based on the difference between the price they negotiated in the market and their value (for buyers) or their cost (for sellers). For example, if a buyer as signed a $3.25 value was able to purchase the good for $1.50, that buyer would receive cash bonus of $1.75 for that transaction. The point is that both buyers and sellers had a cash incentive to play the game for keeps. As a way of trading, Smith employed a system in which any buyer or seller could announce a bid or an offer to the entire group-a system called a double-continuous auction-based on rules similar to those governing stock markets and commodity exchanges. A transaction occurred whenever any buyer accepted an offer to sell or when any seller accepted an offer to buy. Smith found that the price quickly moved to the market-clearing level, which in his experi ment was $2.00 Economists have since carried out thousands of experiments to test the properties of markets. These show that under most circumstances, markets are extremely efficient in moving goods from producers with the lowest costs to consumers who place the highest value on the goods. This movement maximizes the sum of consumer and producer sur plus and thus maximizes social welfare. One surprising finding is how few participants it takes to establish a market price. Market experiments sometimes use only four buyers and four sellers, each capable of trading several units. Some experiments use only two sellers, yet the competitive model performs well under double-continuous auction rules Professor Smith won the Nobel Prize for his work in experimental economics Incidentally, most U.S. retail markets, such as supermarkets and department stores use posted-offer pricing-that is, the price is marked, not negotiated. Experiments sho that posted pricing does not adjust to changing market conditions as quickly as does double-continuous auction. Despite their slow response time, posted prices may be the choice for large, relatively stable markets, because posted prices involve low transaction costs---that is, buyer and selle don't have to haggle over each transaction (imagine negotiat ng the price with a Walmart clerk for each item you wanted to buy). In contrast, double-continuous-auction pricing i volves high transaction costs and, in the case of some stock and commodity markets, requires thousands of people in full me negotiations to maintain prices at their equilibrium levels ough the Internet is reducing these transaction costs) Ex periments provide empirical support for economic theory and yield insights about how market rules affect market out es. Experiments also help create markets that did not exist efore, such as the market for pollution rights or for broadcast om

Explanation / Answer

According to Vernon’s experiment, those buyers ended up with a surplus at a market clearing price of $2 for whom the price negotiated in the market was less than $2.

Similarly, a surplus was held by a seller at a market clearing price of $2 when the price he received in the market for selling his product was more than $2.

The buyers and sellers who did not take part in making transactions were those for whom the value (for buyers) or the cost (for the sellers) was lesser/ more than the market price. In such cases, say, for the buyer, if the value of the good is less than the prevailing price, the buyer will not engage in the transaction and in the other case, for a seller,when the cost borne by him for selling a good is more than the market he would receive in the market by selling it, he would rather prefer not engaging himself in the transaction.

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