1. a) Explain what happens to observed prices in posted offer and double auction

Question

1. a) Explain what happens to observed prices in posted offer and double auction markets when there at least two sellers. b) Explain what happens in these two markets as the number of sellers drops to only one seller. c) explain how part b) illustrates to the first experimental principle

2. Recall the loser pay winner auction experiment done in class. (a) Discuss how these experiments explain why the bidders changed their minds toward wanting to bid well above the value of the prize, even though they refused to do so at the beginning. (b) Discuss how the experiment explains why George Bush and many citizens changed their minds about a "preemptive" attack on Iraq. (c) How do these experiments explain why England wanted to tax trade in the American colonies; which led to rebellion and the formation of the United States

Explanation / Answer

Posted Auction

In a posted offer market, sellers publicly announce prices on a take-it-or-leave-it basis. In non-laboratory markets publicly posted list prices have become common in the last century for most of the developed economies. The essence of the trading rule in this market is described below.

The standard posted offer auction in a laboratory consists of an indefinitely repeated series of periods. In each period, trading occurs in two stages. In stage one, each seller privately selects a price for the period and indicates the maximum number of units to be offered at that price. Each seller's price ( and not the quantity) is displayed to buyers and to other sellers, once they have completed their own posting decisions. After all sellers have posted their prices in stage two a shopping sequence begins.

Buyers are randomly drawn, one at a time, and are given the opportunity to make purchases from any seller who has not sold his maximum specified sales quantity. When a buyer is done shopping another is selected. This process continues until all buyers have shopped, or until all offered units have been purchased.

There are many variants and special cases of posted-offer auctions. One common one is when the roles of buyers and sellers are reversed, so that buyer posts bids and sellers are selected in random order to make sales decisions, the institution is called a posted bid auction.

Double Auction

A double auction is a process of buying and selling goods when potential buyers submit their bids and potential sellers simultaneously submit their ask prices to an auctioneer, and then an auctioneer chooses some price p that clears the market: all the sellers who asked less than p sell and all buyers who bid more than p buy at this price p. As well as their direct interest, double auctions are reminiscent of Walrasian tâtonnement and have been used as a tool to study the determination of prices in ordinary market

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