Experiment 3: The Cars Market Running the experiment

Protocol

An even number of participants is required for this experiment. Two roles will be distributed between the students. Half of them will be cars production firms; and, the rest will participate as cars consumers. Select some voluntary students (5 are enough for 70 participants) to be assistants in the activity. They will:

• Check transactions are valid
• Register transactions in the contracts in the excel template (see materials and resources).

It’s an exciting practice to write down theoretical predictions in a sealed envelope before the experiment, as in the potato market activity. Precise predicted behavior is in the excel template. Once the activity is prepared, give your students the next instructions:

• You will experience a live cars market in this classroom.
• It will last 10 months that will last 5 minutes each.
• Before we begin, I need some voluntary assistants who will not participate in the experiment. They will check validity of transactions and make the records in the computer.
• Half of the students will be cars producer firms. You will face a marginal cost of production.
• The rest of you will be consumers. You will perceive an individual willingness to pay for a car.
• The assistants will provide you next:
  1. The card with your role and two cars to trade.
  2. If you are a firm, you will see production costs of each car.
  3. If you are a consumer, you will see your maximum valuation of an additional car.
  4. Two contract formats to register any transaction between firms and consumers. Firms will have the contracts.
  5. A personal accounting format you will use to keep track of your individual performance each day.
• You don’t have to buy if you don’t want. You may sell or buy the number of cars you prefer (between zero and two).
• Each transaction you make will determine your benefit:
  1. Firms will earn the difference between the negotiated price and your production costs (Give an example of this).
  2. Consumers will have a benefit equivalent to the difference between your maximum willingness to pay and the price you actually paid (give an example with prices).
• Once I open the market you are free to stand up and negotiate with others.
• If you find a deal you like, you will have to:
  1. Register your individual earnings in your accounting format.
  2. Fill and formalize your contract format with one of the assistants in the front table. The will check you have enough cars; and, they will mark them as “sold” in your individual cards each round.
• Once time is over, no more transactions will be received in the table; and, they will not count if they are not registered with the assistants.

Next, numerate your students between one and two. Numbers one will have a role; and, the rest will have the contrary.

Run the first 5 rounds of the experiment with a timer.

In round six, give your participants the following instructions:

• We have already completed five months in the market. During this time, roads have deteriorated using traded cars. In addition, the air has suffered a lost in its quality. Currently, you can perceive air pollution in the mornings while driving through the streets.
• Given this new situation, consumers perceive less benefits for driving their cars. Therefore, if you are a consumer, you will have a willingness to pay equivalent to the one registered in your card minus (mention the size of the externality registered in the template. Then, give an example).

Class discussion

After round ten is over, motivate discussion with the next questions while the assistant finishes registering data. The template will generate graphics with the average prices of transactions and quantity of traded cars.

Materials and resources