Wednesday, September 24, 2008

I'd make a good capitalist after all

Here is an interesting online game you can play with your friends. It models the Market For Lemons scenario that I've been blogging about a lot in the past week.


The way my classmates and I played, 4 sellers were pitted against 6 buyers. The first 4 rounds we (the buyers, I was a buyer) had symmetric information, meaning we knew exactly what the quality of each product was and its price. Grade 1 had value equal to a price of $4.00, Grade 2 had $8.80 and Grade 3 had $13.60.

As shown in the screenshot - the last 4 rounds we (the buyers) had asymmetric information, meaning we had no idea what the quality of the products were; we only knew the price. In that case, just as George Akerlof described, no seller would put Grade 2 or 3 on the market because no buyer could be sure he or she wasn't losing money on the trade. Each buyer would be safest assuming that each product was Grade 1 in that case and then make purchases accordingly. This drives out Grade 2 and 3 products and the market is flooded with Grade 1s, or "lemons". CONCLUSION: there'd be no good products in this market without symmetric information.

At the end of the rounds I made more money from buying than the other capitalists, so, hey, yay for asymmetry! I still plan on keeping my "SHOPPING PRIORITIES" straight.

idea: next time we should model collusion by allowing buyers and sellers to communicate via IRC chat.

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