Pure Exchange Trading Cases
To understand price discovery in markets with variable numbers of buyers and sellers
Price discovery; monopoly; monopolistic competition; competitive markets; supply and demand
· Case MONOP
o In this case, there is one seller and many buyers for a product. The seller has a value for the product; you can think of this as representing an exogenous market to which the seller always has access. Each buyer has a value for the product as well. If your value is higher than that of the seller, then you would like to buy the product, and the seller would like to sell it to you, since you can both gain from the trade. Different buyers can have different values, and the which buyer transacts with the seller will depend on what happens during trading. The seller has multiple units of the good, so is willing to trade many units. Similarly, a buyer can buy multiple units from the seller.
o The buyers start out with cash only, and the seller starts with a number of units of the product.
o At the start of trading, you are told if you are a buyer or a seller, and what your value is.
o Buyers can only post bids or buy from asks.
o The seller can only post asks or sell to a bid.
· Case MONOPCOMP
o This is the same as case MONOP, except that there are a few sellers (all with the same value)
· Case COMP
o This is the same as case MONOPCOMP except that there are many sellers (all with the same value)
Your objective in any of the cases is to make as much money as you can. So if you are a buyer, you want to buy the good at a price as far below your value as you can; if you are a seller, you want to sell the good for a price as far above your value as you can