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Extracting Valuable Information from Classroom Trading Pits

  • Author(s): Bergstrom, Ted
  • et al.
Abstract

Edward Chamberlin, who initiated classroom market experiences, used the results of his experiments to argue that competitive equilibrium performs poorly in explaining the outcomes of real markets. Vernon Smith altered the design of Chamberlin's experiment so as to increase the amount of price information available to traders and in classroom experiments with this design found that trading outcomes were close to those predicted by competitive theory. This paper examines results of classroom trading experiments using the design found in Experiments with Economic Principles, an introductory economics text by Ted Bergstrom and John Miller. The procedure in this experiment is intermediate between that of Chamberlin and that of Smith. We have collected data on transaction prices and quantities from a large number of classroom experiments using this design. We compare the experimental outcomes with the predictions made by competitive equilibrium theory and by a simple profit-splitting theory. Evidence suggests that neither theory is entirely successful, though in the first rounds of trading there seems to be a significant amount of profit-splitting and as traders become more experienced, outcomes are closer to those predicted by competitive theory.

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