We will be running three rounds of the experiment. In each round, you will be given a slip of paper which advises you whether you are a buyer or a seller, and if you are a buyer, what your valuation of the software is if you make a purchase. If you are a seller, you will be given a pile of transaction recording slips on which to record the transactions you make. When you make a transaction, you should pass the record slip to me or the TA, so that the price you charged can be posted.
Experiment Format I
Buyers value consumption of 1 unit of the
software (and only 1 unit). Some buyers are high-valuation buyers and
value the software at $5000, where the $5000 denotes this buyer's maximum
willingness to pay for the software. Other buyers are low-valuation
buyers and value the software at only $500.
If you are a buyer and purchase one unit
of the software at a price P, then your profit on the first purchase
is BV-P (where BV is your buyer valuation). If you buy
any additional units of the software, your total profit will go down by the
amount of your purchase: you get no additional benefit from the purchase of
addition units of the software.
Sellers' costs of production are all fixed
and equal to $1250. If you are a seller, you may sell as many units of
the software to buyers as you wish at zero marginal cost for each
unit. Hence, if you sell to N different buyers at prices Pi
then your profit is SPi
-1250.
In Experiment Format I, one-third of all
buyers are high-valuation buyers, while the remainder are low-valuation
buyers. There is also a single seller for this version of the
experiment.
In all rounds of the experiment, your profit will be converted into homework credit at the rate of 1/10th of a point per dollar of profit.
Experiment Format II
Format II is the same as Format I except that there are multiple sellers.
Experiment Format III
Format III ("Napster format") is the same as Format II, except that now, any buyer who purchases a unit of the software is free to make a copy of sell it any other buyer who has yet to make a purchase. In this round of the experiment, there will be transaction record slips available to any buyer who chooses to resell after making a purchase.