Interactive Market Experiment: Trading MP3 Players with Info & Protection Variations - Pro, Assignments of Economics

Download Interactive Market Experiment: Trading MP3 Players with Info & Protection Variations - Pro and more Assignments Economics in PDF only on Docsity! Print this page. Econ 001 Levinson -- Fall 2007 Preparing for the Asymmetric Information and the Market for Lemons Experiment Prepares students for the Asymmetric Information and the Market for Lemons experiment. Professor Description: Prepares students for the Asymmetric Information and the Market for Lemons experiment. Provides trading tips and explains the four variations of the experiment: full information, hidden information, consumer protection laws, and product warranties. Assign as a graded problem set with a due date prior to the start of the experiment. Scenario Overview Your professor has asked you to participate in an interactive market experiment in which you will learn how markets function when information about the quality of goods can differ. These instructions will help you get ready to trade. This is a market for MP3 players. You will alternate between playing the role of a seller and the role of a buyer. If you're a seller, you will choose the quality of MP3 player you would like to sell and set the asking price for it. If you are a buyer, you will decide whether to buy an MP3 player from one of the sellers at the price he or she lists. One of the things that makes this market different from the market for used textbooks (you may remember doing that exercise earlier in the semester) is that MP3 players are not identical. Depending on the battery life, MP3 players can be either of high or low quality. If you're a seller, manufacturing an MP3 player with long-lasting batteries will cost you more than manufacturing an MP3 player with short-lasting batteries. If you're a buyer, you'll be willing to pay a lot more for a high-quality MP3 player--but only if you can be sure of its quality. Scenario Seller Costs The sellers in this game produce MP3 players on a "made-to-order" basis: that is, they advertise MP3 players, and then, when they receive an order, they purchase the parts from distributors and manufacture the player. You can sell at most one player per round. Every seller in the game can choose to manufacture a high-quality MP3 player or a low-quality MP3 player. It costs more to produce a high-quality player, but buyers are willing to pay a lot more for high-quality players. Page 1 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print If you've been given the role of a seller, your gain is the difference between the price you receive for an MP3 player and your cost of producing that player. You may have a different gain for each quality of MP3 player, and you will have to calculate both to figure out which is the best deal. For example, suppose you have a seller cost of $20 for a high-quality MP3 player and a seller cost of $12 for a low-quality MP3 player. If you sell a high-quality player for $25, your gain is $5; if you sell a low-quality player for $15, your gain is $3. Scenario Suppose that you are a seller. Your seller cost is $40 for a low-quality MP3 player and $60 for a high-quality player. Question 1.1 1.1. Suppose you sell someone a high-quality player for $80. What is your gain or loss? A. $80 gain B. $20 loss C. $20 gain D. $60 loss Question 1.2 1.2. Suppose you sell someone a low-quality MP3 player for $50. What is your gain or loss? A. $50 gain B. $60 loss C. $10 gain D. $40 loss Question 1.3 Page 2 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print The purple lines show the asking prices for sellers of high-quality MP3 players, and the yellow lines show the asking prices for sellers of low-quality MP3 players. If you're a seller, your asking price will be represented by a green line. The graph also shows how much time is left in the round. A buyer can get more information from a seller by mousing over that seller's line on the market graph. Mousing over a line that extends up to the current time brings up a box with price and quality information for this seller. (In some variations, it also tells you whether the seller is offering a warranty.) If the buyer decides to purchase the MP3 player, he or she must click on the line. A dialog box will then appear asking the buyer whether or not he or she wants to proceed with the purchase. You can think of the lines on the graph as a record of the asking prices from all the sellers. A line extending up to the present time represents an MP3 player that is still available. Mousing over a line is like going to the seller's website or store to get more information. As a buyer, if you like what you see, you can buy it. But remember, there are other buyers, and the good may be sold by the time you make your decision. If you don't want to buy from a particular seller, you can mouse over another seller's price and try again. Question 4 4. True or False: Suppose you are a seller. If you can't make a gain with the low-quality MP3 player, you can switch to producing a high-quality player. True False Question 5 5. If you are a buyer, what is the maximum number of MP3 players you will be able to buy in one round of trading? A. 1 Page 5 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print B. 2 C. 3 D. 4 Question 6 6. True or False: If you are a seller and you are not able to sell an MP3 player in a particular round of trading, you can carry it over and have an extra one to sell in the next round. True False Scenario Transactions The only way a transaction can happen is if a seller makes an offer and a buyer accepts it. Let's look at a market transaction from both the buyer's perspective and the seller's perspective. The diagram above shows the buyer's perspective. After about 64 seconds of trading, this buyer accepted a $90 asking price for a high-quality MP3 player. To calculate this buyer's gain, look for her high-quality buyer value in the upper right corner of the screen: $100. The Transaction Details section on the right shows that her gain in this round was $100 - $90 = $10. Page 6 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print The diagram above shows the seller's perspective for the same transaction. The three green lines represent this seller's asks. At 17 seconds into the round, the seller started out offering a low-quality player at $62, but nobody bought it. At 31 seconds into the round, she withdrew her offer. At 38 seconds, she submitted a new offer, this time for a high-quality player at $95. Again, nobody bought it. At this point, she noticed that the last sale was a high-quality player at $91, so she withdrew her bid and offered a high-quality player at $90. Then, at 64 seconds into the round, someone finally bought her player. Since it cost her $85 to produce the high-quality player, she made a gain of $5. Question 7 7. Suppose that you are a seller. Your seller cost is $28 for high-quality players and $21 for low-quality players. You've submitted an offer of $36, but no buyer has accepted your offer. The lowest current ask for high-quality players is $33, the lowest current ask for low-quality players is $22, and the round is about to end. There is only enough time for you to withdraw your current offer and submit one last ask. Of the following options, which is most likely your best choice? A. Leave your offer where it is and let the time run out. B. Withdraw your current offer and make an offer of $30 for a high-quality player. C. Withdraw your current offer and make an offer of $28 for a high-quality player. D. Withdraw your current offer and make an offer of $21 for a low-quality player. Scenario Variations There are four variations of this experiment. The next few screens explain the differences between these variations. Your professor may elect to do some or all of them. Across the different variations, you alternate roles: you'll be a buyer in some variations and a seller in others. The buyer values and seller costs will stay the same. The key difference between the variations lies in the information that buyers have about the quality of the goods they are buying and the recourse available to unhappy buyers who are tricked into buying a low-quality player by a seller who pretends that it is a high- quality player. Within each variation, all aspects of the market remain the same. This means that you can use what you've learned in a previous round to guide your strategy in the next one. Page 7 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print Once the round ends, buyers find out the true quality of the players they have bought. Consumer protection laws allow the buyer to return a low-quality MP3 player that was falsely advertised as a high-quality MP3 player. If this occurs, the buyer is presented with a dialog box at the end of the round asking whether he or she wants to keep the player or return it. If the MP3 player is returned, the buyer earns nothing and loses nothing. A seller whose MP3 player is returned loses a small amount of money that reflects the cost of handling the return. Scenario Warranty Variation This variation starts out like the previous one, in which sellers can falsely (or accurately) advertise the quality of their MP3 players. Again, buyers find out if the advertised quality is correct once the round ends. The difference in this variation is that there are no consumer protection laws that allow buyers to return MP3 players that were falsely advertised. Instead, MP3 players may come with a product warranty. Product warranties mean that the buyer can ask the seller to fix an MP3 player that does not offer the advertised quality. Sellers who offer a warranty and sell a low-quality player that is advertised as high quality will incur a cost to upgrade the player. Products without warranties can't be returned, and sellers need not fix them or upgrade them to the advertised quality. In addition to choosing the true quality and the advertised quality, sellers get a choice about whether to offer a warranty: Page 10 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print Buyers can tell which MP3 players have warranties by using the Warranty filter (located above the graph in the Market screen) or by mousing over a line in the graph. If a seller offers a warranty and sells a low-quality player that was falsely advertised as high quality, the buyer may invoke the warranty. When a warranty is invoked, the seller must fix or replace the low-quality MP3 player he or she sold. Sellers have to pay a $35 fee to upgrade the product plus a $5 fee for handling the upgrade, so it is generally not a profitable strategy to advertise a low-quality player as a high-quality player and plan to repair it later. Scenario Using the Warranty Filter If you're a buyer during the Warranty variation, you'll want to know which products are being offered with a warranty. To do this, use the radio buttons at the top of the Market screen. You can toggle the view to show only products that are being sold with a warranty, only those being sold without a warranty, or all products regardless of whether they have a warranty. This will help you make an informed decision about which product to purchase. Scenario Suppose you are a seller with a seller cost of $65 for low-quality MP3 players and $95 for high-quality MP3 players. You decide to produce a low-quality player, advertise it as high quality, and offer a warranty. Suppose that someone buys your player for $110 and then invokes the warranty after finding out that you falsely advertised. Page 11 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print (Hint: You may want to go back two screens to review the exact details of what happens when a product is returned.) Question 9.1 9.1. How much profit will you make on this transaction? A. -$5 B. $0 C. $5 D. $10 E. $15 Question 9.2 9.2. Suppose that you can sell a low-quality player for $75. Is it more profitable for you to falsely advertise, sell it for $110, and pay the upgrade and handling fees, or to advertise truthfully and sell the player for $75? A. Falsely advertise and sell the player for $110. B. Truthfully advertise and sell the player for $75. Scenario Suggestions for Trading Sellers: Don't sell below your cost. Try to figure out whether it's more profitable to sell high-quality or low-quality goods. Buyers: Don't buy above your buyer value. Keep track of quality--it determines how much gain you make on a purchase. Be careful in the variations in which you do not have full information about quality. Watch the clock. Sellers, if the round is almost up, you should drop your price if you can do so and still make a gain. Buyers, if the round is almost up and there is an offer you can accept and still make a gain, you should go for it. Due Date: 11.19.07, 09:15 AM 12/Practice Visible to Students Copyright © 2001-2007, Aplia Inc. All rights reserved. Page 12 of 12Aplia Inc: Print Aplia Assignments 11/12/2007http://courses.aplia.com/af/servlet/print